How to Select The Ideal Stocks To Trade
The process of selecting the ideal stocks to trade is one of the most important but often overlooked components in a Trader's arsenal.
It becomes difficult to select the ideal stock because we are constantly being bombarded with too much information from CNBC, the internet and the media. Sure there's a lot of good information out there but there is far more noise than actual substance.
The series, 'Trading Lessons From A Hedge Fund Trader' will touch on the subject of how to trade around and take advantage of the News but we will save that for another article. FYI, the 2 hardest and most stressful trading days in my career was July 7, 2005 'London Bombings' and May 6, 2010 'Flash Crash'.
I use the word IDEAL stock because we want to be trading the stocks that best suit our trading algorithms and strategies. When I was a Hedge Fund Trader, I didn't care about the actual name of the Future or Stock that I was trading. I was only concerned if the security had:
1. Enough LIQUIDITY (trading volume and available size)
Most people don't utilize trading algorithms and strategies so my suggestion to you is for you to learn how to identify which stocks are HOT and are in PLAY and how to trade in the direction of their main trend.
It's equally important to learn how to identify stocks that are no longer in PLAY because we don't want to have our money sit in stocks that aren't moving.
Today we will be analyzing the following stocks which were sent to us from our readers on BehindWallStreet.com on the Free Stock Analysis For Your Portfolio service.
SC.TO (Shoppers Drug Mart) on the TSE.
Cisco Systems on the (NASDAQ: CSCO)
Santarus on the (NASDAQ: SNTS)
Here's a case for DEAD MONEY:
Let's take a look at SC.TO (Shoppers Drug Mart)
-note that the stock was taken over by Loblaw L.TO
This is a 3 year weekly chart of SC.TO, notice how SC.TO traded in the $35 to $43 range from October 2011 to April 2013. I call this the Accumulation Zone or the Dead Money Zone because the stock isn't really moving.
As a trader you want to avoid all cases where your money is sitting there collecting dust, don't bother trying to collect dividends when you have the ability to find stocks that are moving. Dividends should be viewed as a gift for holding the IDEAL stocks at the right time. Don't chase a 3% dividend when the stock's average volatility is over 20% because the math tells you it's not a good risk reward scenario.
SC.TO Broke out of $43 Dead Money Zone high in May 2013 and did the Classic retest of the $43 high and has been off to the races ever since.
The Classic retest of the Dead Money Zone High is one of my favourtie trades. I will write an articles on that at a later date.
SC.TO offered us 2 trading opportunities:
Rule # 1 for the average trader:
Now the stock is back in the Dead Zone again. If you didn't capitalize on the 2 trades I outlined then it's too late, leave the stock alone. The move is done, find the next trade.
I circled the huge volume print in July 2013 for a reason. This volume print is huge and much larger than its average volume. It's telling me all the energy (the stuff that propels the markets) has been spent. That's one of the clues for looking for an exhaustion move. It's similar to a baby crying before it sleeps, it has to get rid of all its energy before it can peacefully sleep.
If you are LONG SC.TO, I would take my profits and run. If you personally want to hold the stock, then do so but make sure you sell at least half or 2/3s of the position.
When the trading Gods gift you with a Take Over in your favor, just say thank you and take your profits and run.
But the important thing is to learn your lesson and NEVER, EVER trade counter trend to a stock that breaks from a Dead Zone. NEVER!
Let's look at CSCO (Cisco Systems) on the NASDAQ.
This is a quick scan and throw away. Learn how to do this quickly, when you find a stock that fits your technical criteria then we will apply fundamental analysis to see if it is worth trading.
The 10 year monthly chart tells me that this once high flyer IN PLAY super star is out of play.
Sure that stock has been in a nice uptrend from October 2012 on the daily chart but when you look at its history, it's telling you that you should look at another stock that is breaking out. Besides, I don't like seeing a range bound stock moving up on weakening volume, it's a bad omen.
The other main clue is this: The market has been flying since 2009 and CSCO has underperformed the market since that time. Find stocks that are outperforming the market averages, otherwise you're better off just trading the market index because it's safer. We only want to take on additional risk when there is potential for extra reward.
Let's look at SNTS (Santarus Inc) on the NASDAQ.
This stock gives us the picture perfect setups, it's a thing of beauty. But as beautiful as it looks, the move is done. Take profits and look to SHORT on the next pop up, that's a topic for another day. I will consider writing this up if there's enough interest and layering fundamental analysis into the whole set up.
The trade set up:
1. Dead Zone trading range from July 2010 to Dec 2012. That's when we leave it alone. We are looking for a break from this zone.
2. Break out of Dead Zone high $4 on increasing volume. Always take it and use a STOP.
3. Retest of the $5 High in August 2012 and move up starting in September 2012. The retest of the old high is one of the best, safest and instant gratification trades in the book.
4. The steady rise from 2012 to July 2013 on increasing volume and no pullbacks. The trick in this case is to watch for volume surges and change in shape in the rising stock. When that sucker stops going up on the moving average, it's a sign for curtains, the end of the LONG setup and the start of the SHORT set up.
The 4 lesson we learned today:
1. Avoid trading in the Dead Zone because your money is better off in stocks that are moving.
2. Take the Break out trade from the Dead Zone and the set up is stronger the longer the stock has been in this zone.
3. The retest, if there is a retest of the Dead Zone High or Low offers us the best possible trading scenario.
4. Exiting the trade while it is still hot, leave some meat on the bone for the next trader.
Study the SNTS (Santarus Inc) chart on your own time. It provides us with a picture perfect visual image of the ideal technical trade setup for the times when you should own and avoid any stock.
If you would like us to analyze any stock for you, go to Free Stock Analysis For Your Portfolio service on BehindWallStreet.com.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.