What Stocks to Trade and Why

I've Already Selected Them for You

Selecting stocks to day trade is one of the easiest tasks you'll encounter while trading my system. The act of actually trading them for consistent profits is the real challenge!

I've devised a stock-selection criterion system for you. This system greatly reduces a lot of guesswork in choosing the right stock to trade, and when you trade these stocks you'll have a better chance at profiting consistently.

You may already have a few stocks that you're accustomed to trading. You may have been successful at trading them in the past, but they must pass my selection process. If they don't pass, then you will have let them go. If you're emotionally attached to your stock(s), it will inevitably hurt you in the long run. If you have been trading a loser simply because you are trying to recapture your previous losses, then just let it go—move on.

Before we get into the actual criterion list, I want to make these two points: First, this system does not foretell whether the stock is going to gain or lose value in the near future. It focuses more on the consistency of the stock price's intra-day and swing fluctuations. This means that your stock should be highly predictable on how it trades. We are day traders, not investors; therefore we don't focus on what the stock will be doing next week or next month. We simply need to know how it will be trading today.

Second, your stock may be great to trade today, but it can quickly lose one of the primary criterion factors and not be worthy of your stock watch list tomorrow. For instance, when the price drops below $100 it will simply not work with my system. Therefore, you must monitor and research each stock every day, and become highly familiar with their news, price levels, chart patterns, and how pre-market trades. The more you trade your stock, the more this will become automatic for you.

The best advice I can give you here is to never become emotionally attached to your stock(s). If the stock doesn't pass the criterion-selection process, then let it go. Move on to better stocks that offer greater intra-day trading opportunities.

Learn My Stock-Selection Criterion System

Following is a list of each mandatory stock-selection criterion factor. If your stock doesn't pass one of these listed criteria, then you must not add it to your stock watch list.

• The average daily volume (calculated over the past 12 months) must be at least 1 million shares traded daily.

  There are several reasons why the daily average volume is the primary factor in my stock-selection process. The first is liquidity. Your stock must have sufficient intra-day trading volume. Any stock that is trading under 1 million shares per day can be easily manipulated by market makers (MMs), and they usually trade very slowly. Think about it this way: do you really want to be trading a stock that Wall Street obviously wants nothing to do with (low volume = low interest in the company)? A low-volume-traded stock simply means it's not worth trading. If you think you know something that Wall Street hasn't caught wind of, then you're setting yourself up for a major fall. Again, we are not investors, we are day traders. We aren't trading on news or future earnings growth. We are trading on the intra-day price swings. You need high volume in order to make several roundtrip trades per day.

  Second, the differences between the bid and ask prices become more narrow when the volume is above 1 million shares per day. Low-volume stocks usually have huge gaps between the bid and ask prices. You don't want more than a penny gap. Some $100+ stocks will have larger bid/ask spreads, depending on the time of day. If the bid price is $135.25, then the ask price should be $135.26. This single factor will make more sense once you begin trading live.

• The stock price must be between $100 and $250.

  For now all you need to know is that the stocks in this price range are the most highly traded stocks on Wall Street, but also have the largest volatility. We love volatility!

  Also consider that most stocks priced over $100 will already exemplify virtually all the fundamental criteria that make up a great company. They will have consistent volumes, consistent liquidity, and most importantly, are consistently traded by Wall Street.

  Later you will realize that these stocks happen to be the most traded by black-box (high-frequency trading systems). This normally isn't good for investors but is great for my system because the algorithms built into the software that runs it are relatively easy for seeing the patterns, the price levels. I show you the framework later as to how I find and trade those price levels.

  In a nutshell, stocks in the price range are the best to trade when using my system, which is a countertrend trading methodology.

  “Why not priced over $250?” Quite simply, because they are too expensive at that point and take up too much of your capital. They also start to have huge bid/ask gaps, and they will mostly stock-split soon, so there's no sense in trading them anymore.

• The average intraday price swings must be sufficient to trade (as evidenced by chart analysis).

  In Figure L13.1 there is a sample chart that would be sufficient to trade. You want a chart pattern that is consistently fluctuating intra-day. Your stock should be moving at least 15 cents every 10 seconds to 5 minutes. In the chart the price range over a few days remains in a tight trading range between $215 and $220.

  

  Over time you will begin to see and understand these ideal chart patterns. For now, simply look for chart patterns that complement the one in Figure L13.1.

• There must be no stocks affected by frequent government regulations.

  If the stock/company is regularly affected by government regulations and/or approvals—do not trade it. Great examples of stocks that usually are very risky to trade are biotech stocks and military defense stocks. Obviously, recent trading of banks has not been great due to frequent government regulations and low interest rates. Therefore, you shouldn't be currently trading them. But, traditionally biotech and military defense stocks tend to move over 50 percent in one single day when the news hits the wire (good or bad news), whether it be the FDA declining approval or approving a new drug, or the Defense Department cutting the future border control budget affecting several companies that produce products involving terrorist detection.

  You never want to deal with this kind of volatility and uncertainty. Don't ever try to predict how Wall Street will respond to this news. Simply avoid these stocks and any other stocks that find themselves in the national-economic spotlight of uncertainty. There are plenty of stocks out there that are not facing a complete meltdown.

• There must be no current news headlines that directly affect the stock.

  Similar to the previous criterion, this factor involves outside influences. If your stock is constantly in the news headlines due to a major economic issue taking place, then don't trade it. Wait it out.

  Stocks that are constantly affected by the news tend to be highly volatile, and they tend to have very unpredictable charting patterns. You're supposed to be avoiding the noise. You can very easily get sidetracked and stumped by the news that's currently affecting your stock intra-day.

  If you notice that your stock is trading directly on breaking news, then sit on the sidelines and wait. Trade your other stocks not affected by the news until the dust settles.

• There must be no chance, in the near future, that the company will file for bankruptcy.

  This final criterion is very obvious, but you'd be surprised how many amateurs try to trade a stock facing bankruptcy. Usually the stock price is less than $100 on companies facing bankruptcy (so you should not be trading it anyway), but some are still in the process of falling from high price levels.

  The problem with companies facing the possibility of bankruptcy is that the news comes out when you least expect it. And you never know the real details of the bankruptcy until it's too late. Again, you don't want to be trading a stock that has the possibility of losing over 50 percent of its value in one single day.

If you're in my training program, you'll be able to watch the 8 to 10 stocks that I trade consistently every day. Watching my stocks and my levels in real time every day is the best way to speed up your learning process. Once you master my system, you can then add your own stocks and become more independent.