There are a number of ways to analyze a stock by doing some fundamental and technical homework; using some simple scanning criteria can help with this process as well. There are numerous ways to start your research, but it is important to note that traders may have many different styles and strategies.
Some traders like to use scans to find bullish setups while other are looking for stocks in a bearish pattern. Using filters and knowing how they work will help you create a scanning system that works for you.
One of the most popular scans is using moving averages, which detail a stock’s price action by calculating the average closing prices over a certain time period. The 50-day and 200-day moving averages take the sum of the past 50 and 200 trading sessions and divides it by 50 and 200, respectively, to give you the price. Some traders also use 10-day and 20-day moving averages to see if a stock is in a shorter-term uptrend or downtrend.
Average daily volume can be a useful component when looking for stocks on the verge of breaking out or collapsing. If a stock is experiencing big volume on a breakout or breakdown, it typically indicates a possible trend developing, and therefore a trading opportunity.
A stock’s float can be used for both long and short positions, and is simply the number of shares available for trading. Stocks that have a low float tend to be more volatile because they require less share volume to make substantial moves.
With that said, you can also use beta as a way of scanning a stock’s volatility compared to the overall market, which has a beta of 1. Stocks with a value greater than 1 are more volatile and will generally rise or fall more than the market on any given day. Most scanning systems list stocks with betas up to the 3 to 4 range.
Insider transactions can be useful in determining if a company’s management is buying or selling a stock. Insider buying usually indicates management’s confidence in the company, and is probably a bullish signal; insider selling, on the other hand, may suggest the price has peaked or a decline will soon follow.
Aside from these five indicators, traders often scan price to earnings (PE) ratios, dividend yields, sales growth, analyst recommendations (buy, sell, or hold), and return on assets.
These are some of the top filters I use for trade setups and there are many more different filters and combinations you can use when creating your scans. The key to successful scanning isn’t to use as many filters as possible but the ones you understand so you can find better trading opportunities.
