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Narrow Your Scope With Basic Stock Filters

filtering-stocksEach night I work through literally hundreds of charts, aiming to find those setups with an edge.  They’re the ones which allow me to not only clearly define my risks, but also offer potential profits which greatly outweigh those initial risks.

I’m asked quite frequently by traders how I narrow down the universe of stocks to a more manageable list.  The short answer is to start with price and volume filters in order to eliminate the low-dollar stocks, as well as those with poor liquidity.  That alone will give you stocks to consider which aren’t as highly-speculative as penny stocks, as well as stocks which are liquid enough that there should be a buyer when you go to sell and a seller when you go to buy.

Beyond those basic filters though, you may still wish to narrow the list.  In the charting program [1] I use, dozens and dozens of additional filters are available.  Among them are things such as Beta, Trade Range, Average True Range, Expanding Trade Range, Contracting Trade Range, and a lot more.

Just that brief list is enough to help locate stocks which move faster than the broad market, or to eliminate names which simply don’t move enough.

Base Filters on Broad Market Movement

university-120-240-nextlevel [2]When dealing with ‘trade range’ types of filters, you can accomplish a lot.  For example, you might generally use Average True Range to knock out stocks which don’t fluctuate much, helping you to eliminate the ultra-quiet stocks.  When the market is starting to break out, look for Expanding Trade Range to help you locate stocks which are likely participating in the move or gaining momentum.  When the market has made a big move already and is beginning to rest, use Contracting Trade Range to locate more stocks which are basing and may be starting to create patterns.

Don’t seek a one-size-fits-all filter, because it doesn’t exist.  Keep an open mind, and put some thought into what it is you’re wanting to find.  Stay flexible in your approach, and you’ll continually be able to avoid wasting time sifting through stocks which aren’t worth a second look.

The key to effective filtering is to learn over time how and when to vary the filter you’re using based on general market conditions. As you develop that skill, you’ll get really efficient at narrowing down the universe of stocks to a more manageable, appropriate list, depending upon whatever conditions you find yourself trading in.

Trade Like a Bandit!

Jeff White

Producer of The Bandit Broadcast [3]

Are you following me on Twitter [4] yet?