U.S. stock exchanges list more than 8,000 issues, but the typical trader or fund manager accesses just a fraction of this bounty because they’ve failed to build effective watchlists. This happens because identifying stocks that fully support working strategies requires a number of skill sets lacking in most participants. Despite the learning curve, the effort is worthwhile because it marks a trading edge that lasts a lifetime (for more see The Vital Importance Of Defining Your Trading Edge).
A well-organized watchlist requires an understanding of our modern market environment, how different levels of capitalization impact price development and how different sectors react to catalysts over time. Seasonality, sentiment and economic cycles all come into play when picking out candidates you want to follow on a daily, weekly or monthly basis. It’s a complicated process that requires daily maintenance, but the long and short-term rewards are well worth the effort.
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Watchlist requirements align with the amount of time the participant has to trade and to follow the financial markets. A part-timer playing a few positions each week can keep things simple, culling a list of 50 to 100 issues to track on a daily basis. Committed at-home traders and all levels of market professionals need to spend more time on the task, building a primary database that contains between 300 and 500 stocks and a secondary list that fits on their trading screens.
As a general rule, each trading screen can accommodate 25 to 75 issues depending on space taken up by charts, scanners, news tickers and market depth windows. It’s a good idea to devote at least one screen entirely to tickers, with each entry displaying just two or three fields, including last price, net change and percentage change. Add a single chart to this page if you’re visually oriented, linking the tickers to allow a quick review of price patterns during the trading day.
Building a Database
Stocks getting daily attention on your trading screens can come from multiple sources, but a carefully maintained database will provide the majority of these issues while allowing continuous replenishment whenever a specific security gets dropped due to technical violations, dull action or a shift in market tone. Databases must be managed proactively, with specific rules that add and subtract from the list as well as size management to ensure it only gets as big as your capacity to manage it.
Start the database by adding a handful of market leaders, or laggards if you’re focusing on the short side, from each major sector and capitalization level down to $250 million. These sector lists are widely available on the Internet and in most charting software packages. Avoid thinly traded issues during this step, because most carry wide bid-ask spreads that aren’t conductive to an active trading style. Next, create a list of your favorite stocks, which most likely include widely held issues popular with the trading community, like Apple Inc. (AAPL), Amazon.com, Inc. (AMZN) and Facebook, Inc. (FB). Add this list to the database as a permanent group that you’ll watch through all types of uptrends and downtrends.
Don’t skip sectors you’re not trading at the time, because you want to be up and running if rotational behavior hits the market and they suddenly become the darlings of Wall Street. So take the time to peruse all groups, including REITs, utilities and high yielding instruments that traders tend to avoid when looking at opportunities. Foreign stocks trading as ADRs (American Depository Receipts) can also be added as long as you stick with highly liquid issues and charts that aren’t riddled with holes due to nightly gaps.
Scanning for Winners
Now it’s time to scan the market, looking for stocks that meet specific criteria that match your trading style. Once these issues are added to the database, you’ll have a working list that can be rescanned nightly for specific patterns and setups, as well as used to cull out issues you no longer wish to follow. Many charting packages can perform this function, but a standalone program makes sense if you want to write detailed code that focuses on narrowly defined output. This core program should also have the functionality to scan for new issues, as well as to rescan an existing list.
Worden’s TC2000, Wealth Lab and Trade Ideas offer heavy-duty database choices for paying customers, but you could also create one for free with Investopedia's portfolio watchlist experience. Other more limited free and cheaper alternatives include Stockcharts, FinViz, Google Finance, Marketwatch and Yahoo! Finance offering limited watchlist and scanning functionality. Many broker platforms, including Interactive Brokers’ Trader’s Workstation, also provide surprisingly detailed scanning functions.
Avoid being too specific in the initial scanning criteria because your visual review after candidates are added will be more valuable in finding specific opportunities. The objective is to identify candidates you can follow on a daily or weekly basis, watching your favorite patterns and setups come into play. Use the nightly scan after database creation to focus on more narrowly defined criteria, like stocks sitting at key resistance levels that could break out in the following sessions.
Combine simple technical and fundamental criteria to add stocks that may draw wide attention in coming weeks. For example, a scan that includes "price vs the 50-day EMA" and "earnings growth over X quarters" combine nicely to uncover the same stocks that Wall Street analysts are watching from their desks in lower Manhattan.
It’s a waste of time to spend hours creating flawless scanning code that finds perfect gems and no losers, because your eyes will do a better job filling in the missing pieces as long as you commit yourself to reviewing the list nightly or weekly. The objective is to build a loose but effective list, adding and subtracting as you move forward but keeping most of the entries for months at a time, rather than rebuilding from scratch each week.
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Common Ways to Scan the Market
- Candlestick hammers and dojis that identify one-bar reversals.
- Securities with high or low relative strength undergoing countertrend pullbacks.
- Patterns that may signal trend changes, higher or low.
- Alarms that measure unusual activity, like 3 to 5 times average daily volume with little or no price change.
- Percentage change today, in last 5 days, or in last 30 days, filtered by greater than average daily volume.
- Popular breakout and breakdown signals.
- Weak rallies into resistance in downtrends.
The Bottom Line
Build an effective watchlist in three steps. First, collect a handful of leadership or liquidity components in each major sector. Second, add scanned listings of stocks that meet general technical criteria matching your market approach.Third, rescan the list nightly to locate patterns or setups that may produce opportunities in the following session while culling out issues you no longer want to follow, due to technical violations, mergers, secondary offerings or other activities that make it less likely you’ll take exposure.