Scanning For Trade Ideas

With thousands of stocks to choose from, I’ve found the best way to narrow down my universe of choices is through scanning. It saves a tremendous amount of time and I thoroughly enjoy the process. Both building the screens and then watching them populate with ideas, it’s like opening a gift each and every trading day.

Most traders will have a particular setup or pattern that they trade well or tend to have consistent success trading. The goal of scanning and setting up parameters should be to find these patterns regularly and highlight all potential opportunities the market may be offering. The beauty of scanning is it can be highly individualized and results can be achieved to accommodate any timeframe.

Two of my favorite scans involve volume. With the first, nothing gets my attention quicker than a large volume spike combined with strong price action. This may be because of a news event (often a new product or service), an analyst upgrade or positive initiation, or perhaps it’s the company’s quarterly earnings release. Quite often, these spikes are the beginning of trending moves and many times will be highlighted with a price gap. Specifically, I like to look for a minimum 3% price gain on at least a 30% increase in volume above the 20-day volume average. See the chart of APPS below and note the big volume gaps on the last couple of earnings reports (highlighted green)…

Many novice traders will see this type of strong move and immediately think they “missed it” while more experienced traders will dig a bit deeper to find out the story behind the action. As it turns out, APPS is experiencing accelerating sales growth the last 3 quarters (+18%, +45%, +93%) while EPS growth is also accelerating (+25%, +67%, +160%). Additionally, fund ownership has increased from 235 funds to 261 funds over the last reported quarter. Exactly the type of numbers a growth investor wants to see.

It’s not possible, and extremely inefficient, to try to study all stocks in this manner. However, a screen that highlights a sharp daily or weekly price increase as described above can alert growth investors to dig deeper into the story. If one is paying attention, the institutions are leaving footprints. We often refer to them as the “big boys” because they have access to the latest and greatest research, as well as very deep pockets. We’d be wise to follow their lead.

The second scan usually follows up on the first idea I shared above. After a big price and volume spike, quite often a stock will consolidate sideways to slightly lower for several days or weeks on volume that eases along the way. This type of action is healthy and reveals that strong hands are involved and they are refusing to give up their shares despite the recent price gains. The preference is to see this consolidating action have a slight downward bias in price as volume decreases… much in the same way that a handle finishes off a cup pattern.

As the last of the weak holders get shaken out, price will often drift into an important support level or moving average before the next leg up begins. Depending on timeframe, scanning for these pullbacks into the daily 10-day or 20-day moving average for swing traders or the 10-week moving average for position traders can offer low risk, high reward opportunities. See the CELH example below for an idea of how volume contracts into the daily 20-day moving average before volume explodes into the next leg up…

These types of patterns repeat on every timeframe. For example, here’s PAAS, which I’m watching on the weekly chart as it comes in to test the 10 week moving average on quiet volume…

With a bit of thought and creativity, traders can find the right parameters to highlight a preferred pattern on any timeframe. The possibilities are endless. To give you an idea, here are my basic settings for the weekly 10MA pullback scan I just described using TrendSpider…

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Prefer the 200 day moving average? No problem, it’s a few clicks away. Rather use year to date anchored VWAP instead? Again, no problem. Change the indicator within the basic template that I’ve provided here and you’re ready to scan for your next big winner!

Written By @PatternProfits

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