Step by Step System for Building a Watch List
If you trade on multiple time frames, you may want to build a watch list for each time frame. For day trading, you will need to compile a list of movers and gappers before the opening bell. For swing trading, you will want lists that reflect set ups on the daily charts. For longer term trading and investing ideas, compile a list of potential trades taken from the weekly charts. These lists are your inventory, your bread and butter. Cultivate them and you will prosper.
Stock Selection Criteria
Stocks, ETF’s, and Induces you choose to trade need to have sufficient liquidity or volume for the time frame you are trading from. If the charts you are looking at are full of gaps and flat dojis, you need to move your time frame up until support and resistance areas become well defined and price bars are fluid, or delete that symbol form your list.
Low Volume, Illiquid Stock
If your trading account allows you to take large positions, you will want to trade stocks with at least 1 or 2 millions shares traded daily. You will need the liquidity to avoid the slippage. Although scaling into a position is an option here, getting out could be costly if the trade goes sharply against you.
Many day traders don’t trade stocks listed on the New York Stock Exchange because of the slippage and slow execution by specialists. This typically isn’t an issue for small share size or the larger time frames as it becomes less of a percentage of the trade.
Top Down Approach to Building Your Watch List
First, compile a list of all the market sectors and industries. Sort them by %Change. This will give you a clear idea as to which sectors are leading and which ones are lagging. You are going to be prepared at all times for both bullish and bearish biases.
Next, you will need to create a list of stocks for each sector and industry. This can be compiled into one list, but separate each group by spaces. Use the sector/industry symbols for each sub-list as the header. Sort this list also by %Change. This two step process of sorting the sector list and drilling down to the sector symbol list will help you to filter out the movers and shakers.
Copy and past the best potential set ups into a tier 2 watch list where you will give them time to finish setting up. Many times stocks move to far to fast and become over extended. They need time to pull back or consolidate. You will need two tier 2 lists, one for bullish set ups and one for bearish set ups. You will need to scan and prune these lists periodically depending on the time frame you are using it for. You can set alerts at price points that would indicate a trading pattern has ripened.
When a tier 2 prospect has ripened to the point where an entry signal is immanent, paste the symbol into a tier one bullish or bearish watch list. Set alerts for when prices get near your entry price. While waiting for entry signals, take this time to set a stop loss price, calculated your share size, choose profit objectives and then enter these into fields next to the symbol or in an excel spread sheet.
Bottom Up Approach to Building a Watch List
The bottom up approach involves locating individual stocks that are on the move, regardless of which sector they belong to. For some, the catalyst for movement is news related, such as upgrades and downgrades. For others, the catalyst may be institutional buying or selling. One source for moves is NASDAQ Heat-maps: http://quotes.nasdaq.com/screening/heatmaps.stm. You can quickly find the most bullish an bearish stocks and etf’s on the move at the moment. For upgrades and downgrades, I like the efficient way briefing.com compiles this list: http://www.briefing.com/Investor/Public/Calendars/UpgradesDowngrades.htm. Most news portal sites will have a What’s Moving list of stocks and sectors as well as a percent gainers and losers list. Scan the news headlines for ideas. Watch the CNBC ticker tape for movers also.
As you gather new inventory for your watch lists, you will divide them between the bullish and bearish lists. You will now begin the same sorting and filtering process that I explained in the Top Down Approach. You will move your inventory from tier one to tier two as set ups ripen. Set your alerts. Determine stops. Calculate share size. Set profit objectives. Log everything into the watch list and or spreadsheet.
Keep a separate watch list for active trades for easier trade management. Set alerts near profit objectives or key areas of support and resistance so you can evaluate the trade. For bigger time frames, you may automate your order entry and stop loss. The weekly time frame is especially conducive to automation. You don’t have to be in front of the computer to trade smart. The shorter time frames will require you to confirm your market bias before pulling the trigger.