Screening and Selecting Swing and Momentum Stock Candidates [PDF]

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Screening and Selecting Swing and Momentum Stock Candidates - How to find daily and longer-term trading candidates quickly - How to screen them - Strategies for trading them

How to find daily and longer-term trading candidates quickly • Today, I’m focusing mainly on two types of trading candidates: 1. Short term (2-3 day) trading candidates 2. Longer term (a few days to a few weeks) trading candidates • The main screening tool we are using: https://www.tradingview.com/screener/ (Free) • Tradingview’s screener is somewhat limited, but it’s still the best available that I know of for the Malaysian stock market. • By screening for very specific things, we can identify not just candidates but also market conditions.

Screening Filters

• 5 EMA: This is essentially the faster move. The 5 is used because we want relatively quick moves. • 20 EMA: Usually, the slower moving average will be 3-6 x the faster one. In this case, we use 20 because that is what the screener has available. • Volume: Average (30 day) volume > 500K. You can adjust this to make it a bit higher (e.g. >1M), but probably not much lower. This will save you time if you want to be stricter with screening only high liquidity stocks that will give you less trouble getting in and out. - There are several volume options. You can experiment with using different ones, but this is the one I use. • Time interval: Once you save your filter preferences, you can apply the same filter to different timeframes. This is very useful, as you will see. You can apply the same concepts to discover trading candidates on different timeframes.

Screening Conditions – We are Primarily Interested in the Short Term Bullish Condition

Some Comments on the Market Conditions • We can actually make use of the contrast between different parts of the trend diamond to gauge the bullishness and bearishness of the market. • For example, the bullish market condition is P > 5 > 20. The bearish market condition is P < 5 < 20. We can compare the number of stocks in the bullish versus the bearish screen. • In a very simple gauge of market bullishness/bearishness, we can outright use P > 20 versus P < 20 as a gauge. • This is not directly relevant to what we’re discussing, but it helps you get an idea of market breadth.

267 Down versus 76 Up: Bearish Market Breadth

P > 20 EMA versus P < 20 EMA = General Market Breadth (Non-momentum Filtered)

The Usual Market Breadth Conditions Apply • Clearly, in bearish market conditions, the probability of trades working out is reduced. • So, you have to take that into consideration when applying the trade filter conditions. • Okay, so much for the introductions. Now, we can look at the filters and screens.

High Momentum Daily Screen Settings • Common stock • 5 EMA < P • 20 EMA < 5 EMA • 20 SMA < P • Average volume (30) > 500K

Some General Comments on Daily Screens • You are looking for about a 10% swing from the pullback to the top. • Depending on the trigger you use, you will not be able to get in at the very bottom unless you are very aggressive. • We will look at the screen, and then some examples of entering using trendlines.

Screening the Trading Candidates • You want to do the following: - Screen out: Low liquidity stocks with weird looking candlesticks. Stocks that pulled back with very large red candlesticks. Stocks that pulled back on high volume. Stocks that have already begun to rally and you are too late. (More than 1 day of rally.) Stocks that are in a range. - Watchlist: Put stocks that are racing upwards but not showing any signs of pullback OR are just beginning to pullback (day 1 or so) on your watchlist. Pullbacks on divergence (volume or other divergence) are less attractive. - Trading list: Put stocks that have pulled back to the Cloud on the trading list. (If you want access to the Cloud, WhatsApp me your TradingView username before the end of today.) • To make your life easier, order the screening list from the largest pullback candidates to the smallest, so that you will get those stocks in pullback first.

Notes on Trendline Setups • Draw them on candlestick bodies on the 15-minute chart. • Enter when they are broken on a closing basis. • Do not take trendline breaks that are too steep (greater than 45 degrees). Wait for divergence or a slowing price. • Trendlines need to be updated if price accelerates. • Watch the daily chart as well, and do not take trades once the Cloud has been decisively broken. • Stop loss should be below the low on the 15-minute chart. Trail up on each swing. • Watch the 10% swing level as the profit taking level. Do not enter if your signal is too late.

Questions?

On to Swing Trading • Swing trading is a slightly different situation. We’re looking for deeper pullbacks that will create a rectangle consolation pattern. • Rather than the usual 10% or so swing that we are trying to catch from the daily quick patterns, we are aiming for 20% or more from these. • This consolidation provides a place for us to develop a trade from. • Unlike the short term momentum setups, these require some abilities in pattern recognition, because the screens will not be able to identify the ideal rectangle pattern. Thus, we have to do it by eye. The filter just makes it easier by reducing the number of candidates. • Ideally, you want a consolidation pattern where you can enter from the bottom.

The Rectangle Happens in the Warning Area

Swing Trading Screen Filter

Swing Trading Weekly Screen Settings • Common stock • 5 EMA > Price • 20 SMA < Price • 20 EMA < 5 EMA • Average volume (10 day) > 500K • Run this weekly to find trading candidates. Don’t expect many to appear. This is not a screen that produces a lot of opportunities. The idea here is to get a home run move.

Some General Notes on the Weekly Screen • You may have to wait weeks with stocks on your watchlist before they mature into proper setups. • However, the point here is not to get a lot of trades, but rather good reward-for-risk ones. • By their nature, the stop losses on these will be larger, but they also require less trade management.

Screening the Trading Candidates • You want to screen out the following: Screen out: - Stocks with low liquidity and weird candlesticks. - Stocks that are pulling back without a strong flagpole. - Consolidations that go significantly lower the bottom band of the (50, 1) Bollinger.

A Discussion of Support Levels • You can use the horizontal support levels that you are used to in anticipating where the rectangle will form. • I personally prefer to use the (50,1) Bollinger to identify potential areas of support. • If it breaks the lower Bollinger by too much, I will consider that the trend has turned and will not consider this a rectangle trading candidate. • This is not a discussion of how I gauge momentum, but the Forecasting class people should be familiar with this process.

To Summarise • We have looked at two screens today: - Daily momentum screen - Weekly rectangle screen • The daily setup is clearly easier to identify, because it is higher momentum. It is actually possible to run the daily screen on the weekly and acquire more trading candidates. • The weekly setup is trickier to find, as you can see. Finding an optimal setup is much harder. However, if it managed to break out of a consolidation and head towards a new high, you would have an excellent reward-for-risk trade. The percentage gain is also a factor in the calculations, obviously. However, any good reward-for-risk setup will be reasonable for a trade. • Bear in mind the overall market breadth as well when doing this. Particularly in the case of daily screens, the probability will drop during bearish market breadth periods. • You can use the same general concept for whatever type of momentum trading system you prefer. I tend to use more indicator-based and precalculated support and resistance. • Again, if you wish to have access to the Cloud, you need to let me know. The Bollinger is openly available on TradingView. Simply adjust it to my settings.