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 that 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. (See also: 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 setup 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. (For more, see: What Type of Trader Are You?)
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," looking only 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 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. (See also: 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 that tradable moves will materialize. An example of such a screen may be:
- Price: 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.
- Volume: 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. (See also: Gauging Support and Resistance With Price by Volume.)
- Average Daily Percentage Moves Based on Opening Price: The purpose of this screen is to screen only 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 past 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 past 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 your 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. (See also: 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 Bottom Line
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. (See also: Getting to Know Stock Screeners.)