Trading is one area where less work can often mean more money for the trader. Many stock traders spend hours doing research, but is spending this amount of time necessary for the average trader? Hedge fund managers and traders who control a large amount of capital need to do research in order to find high probability places to invest all that capital, but individual traders are far more nimble, and in fact, a lot of research may be a detriment to independent traders. While research can benefit some traders, in many cases there are alternatives. Find out why when it comes to research, less is often more. (For more, see Can You Invest Like A Hedge Fund.)
Does Research Help the Short-Term Trader?
Swing traders and day traders often spend a lot of time screening and looking through charts for stocks that are about to move. Whether it is looking for breakouts, ranges, chart patterns, indicator levels or current trends that are expected to continue or reverse, searching for the right set-up can take up a lot of time. For short term traders - and even long-term investors - there are no guarantees that this research will produce profitable results, or even profitable trades. After all, a stock that is expected to move may fail to move for several days, weeks or even months.
Research often builds in a directional bias as well. This can mean that a trader will only trade in one direction based on his or her research, even when price indicates the opposite. While it is prudent to "trade with the trend," only looking at one side of the market can lead to missed opportunities or, even worse, failure to realize when we are on the wrong side of a trade.
Short-term traders have the ability to be nimble, and this is their advantage in the market. They can move in and out of positions at will, and with ease. Too much research, and the bias that comes from it, could make a trader is less nimble and may cause him or her to cling to a position based on that research, even as the expected outcome fails to materialize. (To learn more, see Multiple Time Frames Can Multiply Returns.)
An alternative to running constant scans and poring over charts is to look for stocks that are tradable almost every day based on their daily statistics. For example, if a trader is looking for stocks that are poised to move, he or she may screen each night for stocks poised to break out. Some of these stocks may in fact break out the following day, but many may not. As a "less work" alternative, the trader could run a screen once a week on stocks that move a lot each day. In this way, the trader does not have a directional bias, can trade multiple moves in the discovered stocks, and can be almost certain tradable moves will materialize.
An example of such a screen may be:
The price range of stocks a trader would like to trade. A trader must keep in mind the amount of capital available; a high priced stock coupled with volatility may expose the trader to too much risk. For example, a criterion for price may be to find stocks in the $10 to $50 range.
Independent traders should be nimble and thus be able to enter and exit at will. In order to do this, volume must be adequate. A criterion for volume may be to find only stocks that trade at least one million shares per day. (For more, read Gauging Support And Resistance With Price By Volume.)
Average Daily Percentage Moves Based on Opening Price
The purpose of this screen is to only screen for stocks with high percentage daily moves after the open. This allows day traders and swing traders to take advantage of intraday volatility, with no consideration for gaps. An example may be to screen for stocks that have a daily range of at least 5% based on their daily opens over the last month.
If a trader is able to trade stocks that move regularly, there is no need to find the "next big mover." This screen can be tweaked to find stocks that also have narrow ranges and are suitable for catching small consistent moves; this would be accomplished by screening for stocks with much smaller daily ranges (%) based on their open price.
Because we are looking at averages based on the last month (we can use a longer or shorter filter if desired) the screen can be run each week. The stocks that come up can be filtered by the trader and the three to five stocks that are most preferred are the ones that should be traded that week. There is no need for further research. It is also quite common to find stocks that can be traded for extended periods of time; in this case, no further "homework" is required for finding other stocks.
If the screen fails to produce any results, you can adjust our criteria slightly. If the screen produces too many results, make the criteria more stringent so that you are only left with a handful of stocks. Screening software is widely available, and can be found on many websites. (To learn more, check out How Investors Can Screen For Stock Ideas.)
Again, our purpose here is to find stocks that always move intraday, or that fit within a certain intraday pattern that complements your trading style and has a generally consistent range of motion. This will provide you with tradable stocks each day with very little effort.
The amount of research a trader must do can be reduced by trading stocks that have a tendency to make large intraday moves (in terms of percentage) on a consistent basis. Traders can also screen for stocks that move very little and are good for scalping small consistent profits. Such stocks can be found by running a weekly screen (if needed) for stocks that match our price, volume and daily percentage move requirements. These are the stocks you will trade for the week, eliminating the need for further research.
The best thing about being a trader is your ability to be nimble – piling on too much research will only bog you down. (For more, see Getting To Know Stock Screeners.)
Technical IndicatorsLearn one of the most common methods of finding support and resistance levels.
Investing BasicsChanges in technology have turned trading into a career field that’s easy to enter. But staying in it is a different story.
Active Trading FundamentalsDiscover these five must-watch films and documentaries for day traders reviewed with the takeaway lessons that inspire, motivate and entertain.
Trading StrategiesWhen it comes to traders, these are the traits that separate the wheat from the chaff.
Active Trading FundamentalsFear of breaking out of a comfort zone can prevent an investor from reaching his or her full potential.
Mutual Funds & ETFsETFs that offer cost efficiency with high liquidity are ideal for day trading. Here are some of the top ETFs for day trading.
Investing BasicsRead about the most accurate and realistic movies about the financial industry and the people who have to work every day in a fast-paced, high-stakes arena.
Investing BasicsThere are common mistakes traders make when applying Fibonacci retracements to foreign exchange markets. Here are four well-known errors to avoid.
Active Trading FundamentalsHow to balance anticipated vs. confirmed trades to manage potential profits and lower risks.
Trading StrategiesThere are certain benefits and drawbacks that go with being a trader on the West Coast of North America.
Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
Day traders capture profits from the difference between bid and ask prices by scalping stock. Sensing that a stock is going ... Read Full Answer >>
The Federal Reserve Board and the Financial Industry Regulatory Authority (FINRA) regulate buying on margin to a greater ... Read Full Answer >>
Doug Siepman and Etienne Botes developed the vortex indicator to anticipate reversals in price trends. They believed that ... Read Full Answer >>
The trade volume index (TVI) indicates whether an asset is being accumulated or sold. It is calculated using intraday tick ... Read Full Answer >>
Using the volume-weighted average price (VWAP) when trading in short-term time frames is highly effective and simple. One ... Read Full Answer >>