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This week's Trading Lesson
My formula for finding winning stocks is pretty simple. Look for stocks making abnormal price breaks, preferably with abnormal volume, from low price volatility, optimism and through resistance. You can do this when you are day (<1 day hold), swing (1 day to 2 week hold), position (2 week to 6 month hold) or long term trading (6 month + hold). The only difference is what chart time frame you apply the concept to.

If you want to make a swing trade, look for these abnormal breaks from good chart patterns on 15 minute charts. A long term trader will look for this chart pattern on a weekly or daily chart.

The key is that you have to find these stocks early in their runs because the longer you wait, the farther they get from their price base, leaving you with more risk and less reward potential. Catch them early and you can enjoy most of the price move. I discuss this in more detail in this week's Market Minutes video, which you can watch by clicking here.

How do you find the stocks making abnormal price moves from good chart patterns? The answer depends on the type of trading you are doing. The shorter the anticipated hold period, the more important it is to find them early. A day trader needs a sophisticated real time analysis program like Tradestation to catch them just as the moves are staring up.

Tradestation is helpful for swing trading too but less important. As you move toward position trading and long term trading, real time analysis becomes much less important. Day trading is not what most people want to do so utilizing the Market Scan tool on Stockscores.com is more than sufficient.

Here is a really simple thing to do with the Market Scan to find the stocks that are moving. We want stocks that are liquid enough to move in and out of, are moving up stronger than we would normally expect and are making a break through resistance.

Early in the trading day, say the first 3 hours, I scan using the following settings:

•Gain/Loss>= 2%

•5 Day Resistance = Breakout

•Number of Trades > 250 (for all Canadian Exchanges) or 1000 (for American Exchanges)

Closer to the end of the trading day, or in the evenings, I modify the scan as follows:

•Abnormal Activity = Abnormal Day Up

•5 Day Resistance = Breakout

•Number of Trades > 250 (for all Canadian Exchanges) or 1000 (for American Exchanges)

When you look at the charts for the stocks that this scan finds, ask yourself this question first.

„Is the stock just starting to move or has it been moving up for a while?”

I want to find stocks that are just moving from periods of sideways trading because that makes it easier to manage risk and increases the reward potential. The longer you wait, the less upside and the more downside.

I also want to see that the stock is breaking from a rising bottom on the chart as this is a sign that investors are optimistic. The breakout is more important if supported by abnormal volume as well.

It is very important to be patient for good trades. You can find trades that look „pretty good” daily but it is the great looking trades that make you your profits. You will actually make more by trading less provided you are trading less because you are fussy.