Tag: Strategy

Trading Strategy: Using Stock Screeners to Find Potential Buys

Using Stock Screeners

Stock screeners are very useful tools designed to help traders and investors find potential trades and investments. Screeners let you search through all stocks, specifying criteria to reduce the number of results.

A stock screener lets you input data and select the type of stocks they are looking for. The screener then scans all stocks, looking for any stocks that match your screening criteria.

For example, you can screen for all stocks whose price is between 20.00 and 25.00 per share. Then you can add an additional screener criteria: of those stocks between 20.00 and 25.00 price per share, find stocks whose market cap is between $1 billion and $5 billion. And then we can refine this list even further by screening for stocks with a certain Price-to-Earnings (P/E) ratio.

There are many different criteria you can choose when you use a stock market screener. Determining which criteria you use to screen will take a lot of research and experimentation.

We use screeners to find stocks that meet the criteria we like, while weeding out stocks that do not meet our specific criteria. The resulting stocks a screener gives you is called a Watch List. Having a nice, short watch list makes it much easier for traders and investors to perform thorough research and analysis, without wasting time on stocks that don’t fit our trading and investing criteria.

Stock Screener Criteria to Consider

Determining your stock screening criteria is the most difficult part of using stock screeners. Every trader and investor has their own method of research and analysis when they look for potential stocks to buy.

When I use a stock screener, I use a few basic criteria to find stocks I particularly like to trade or invest in.

I search for stocks between certain price ranges. For example, if I am looking for a short term trade, I will search for stocks between 10.00 and 20.00. For longer term investing, I like stocks with higher prices, so my investing price range may be between 60.00 and 200.00.

Another basic criteria I look at is average volume. I screen for stocks with a minimum 3 month daily average volume of over 100,000. High volume means higher liquidity – there are many people actively buying and selling shares. High liquidity means you will have a higher chance of being able to sell the stock when you want to sell it. Lower liquidity and volume may indicate you will have a harder time trying to sell your shares when you finally decide to exit your trade.

For longer term investing I look at fundamental data. I will screen for dividend yields if I need a dividend play. I will also look at the Price-to-Book Ratio (P/B). I also look for two accounting ratios I like: the quick ratio and the current ratio.

There are two easy ways to learn more about the criteria and options available in stock screeners. The first way is to research what each criteria means. When you see “Price/Earnings Ratio” and you don’t know what it means or how it is useful, simply hop on Google, Yahoo! or your favorite search engine, and search for the term. The second way is to experiment with different stock screeners. Play around with them. After you screen, slightly change the criteria you just used and run your screen again. You will get different results.

Making Sense of Stock Screener Results

Stock screeners can be a very useful tool. However, the real benefit comes after you gain more experience using stock screeners and understand the criteria and options you can use in your searches.

Screeners can give poor results. Because of this fact, you will need to do your Due Diligence and thoroughly research each result the screener gives you.

Do not buy and sell based on screener results. Use the screener results as a starting point and perform further research and analysis on the results.

Free Stock Market Screeners

Here is a short, but growing list of free online stock market screener tools.

  • Yahoo! Finance Stock Screener – Yahoo! Finance provides 2 different screeners you can use: a basic HTML version and a much more powerful java based application screener. Yahoo! Finance seems to provide the most criteria available for those traders and investors who want to create complex stock screens.
  • Yahoo! Finance Preset Screens – Yahoo! Finance also has a list of preset screens which are ready for you to execute. Good for people new to screening. Preset screens are also good for people who are not sure what criteria they want to search for.
  • MSN MoneyCentral Stock Screen – MSN Money has a basic web based stock search.
  • MSN Money Power Searches – Power Searches are pre-defined stock screens which can help you if you are not very familiar with screeners and are not sure what criteria you should search for. MSN Money Power Search has a number of predefined stock searches and includes both Technical Screens and Fundamental Screens.

Trading Strategy Articles

Trading Strategy: Using Trailing Stops

Trailing Stops can Limit Risk and Lock In Profits

Trailing stops are a great trading strategy that uses stop loss orders. Simply put, as the price of the stock goes up, your trailing stop will also go up. The trailing stop prices are set at a certain percentage (%) below the current price.

As the price of the stock goes up, the trailing stop will also go up. The stop follows, or trails, the stock price, giving us the name “trailing stops”.

Only Raise Your Trailing Stop – Never Lower It!

The advantage of using trailing stops is that you only raise your trailing stop price. You never lower your trailing stop!

Why do you only raise trailing stops? You want to only raise your trailing stops to reduce risk and lock in profits.

Examples of Using Trailing Stops

Here are examples of trailing stops in action.

You buy XYZ stock at 10.00. In this example we will set our trailing stop price at 10% below the current price. Our initial trailing stop will be 9.00. How did I get 9.00? Take 10% of 10.00 to get 1.00. We’ll set the initial trailing stop at 1.00 less than the current price of 10.00. Subtract 1.00 from 10.00 to get 9.00. If the stock price hits 9.00, our trailing stop will sell our position.

Scenario: Stock Moderately Decreases in Price – XYZ stock declines in price! If XYZ declines in price to 9.50, you will not alter your trailing stop – do not lower your trailing stop order price!

Scenario: Stock Sharply Decreases in Price – XYZ is falling fast! First it hit 9.50, then kept dropping and now it is approaching 9.00. When the price of XYZ hits 9.00, our trailing stop will automatically sell the stock. We will have lost 10% of this trade’s value. Keep in mind that this is 10% of only this trade, not 10% of our total portfolio value. We knew we were risking 10% of our money in this trade. This risk is money we were willing to lose. If XYZ keeps falling to 8.00, we’ll be protected thanks to our trailing stop – we will have sold this position (at a loss) at 9.00. Our risk was limited to 10%. If we didn’t have a trailing stop in place, we would currently be down 20% on this trade – 10.00 price falling to 8.00 is 20% decline.

Scenario: Stock Moderately Increases in Price – XYZ stock increases in price! If XYZ stock prices goes up to 11.00, we will alter our trailing stop. The new trailing stop price will be 10% below 11.00. First calculate this price by taking 11.00 * 10% (10% is the same as multiplying by .10). So we have: 11.00 * .10 = 1.10. Second we will calculate the current price of 11.00 minus 1.10. We’ll set our trailing stop price at 11.00 – 1.10 = 9.90. If XYZ stock hits 11.00, our trailing stop will be 9.90.

Scenario: Stock Sharply Increases in Price – XYZ shoots up to 15.00 per share. We’ll have to calculate a new trailing stop price, again 10% lower than the current price. First calculation: 15.00 * 10% (or .10) = 1.50. Second calculation: 15.00 – 1.50 = 13.50. Our new trailing stop price is 13.50. The return rate from 10.00 to 13.50 is 35%! We’ve just locked in 35% in gains. If XYZ hits 13.50, our trailing stop loss order will automatically sell XYZ at 13.50. If XYZ falls to 9.00 per share, we won’t care. We’ve locked in profits and our trailing stop sold our positions for us.

Trailing Stops Reduce Risk

Trailing stops reduce risk by setting an absolute minimum price and monetary value you are willing to risk and possibly lose. For simplicity I will use a trailing stop price of 10% below the current stock price. The trailing stop price you use depends on your trading style, strategy, and amount of risk you are willing to accept. Some people may want to set a trailing stop at 5% below the current price, while others use upwards of 20% below the current price.

Keep in mind that some stocks are volatile and may fluctuate 5% to 10% in price per week. If your trailing stop is set at 5% below the current price, and the stock falls 5% shortly after you buy it, your trailing stop will execute and sell your stock position at a 5% loss. However, if your trailng stop is set at 10% below the current price, the stock price can initially fall 5%, then the stock price may shoot back up. Volatile stocks require careful research and analysis before you determine the trailing stop percentage to use.

Trailing Stops Lock In Profits

Trailing stops lock in profits or reduce losses when the price of the stock goes up. As the stock prices increases, your trailing stop price also increases.

If the stock continues increasing in price – say 20% above the price you purchased at – your trailing stop will lock in 10% in profits. If the stock continues climbing and hits 40% above the price you bought it, your trailing stock will also climb, locking in a 30% gain! When the stock finally declines in price, your trailing stop will sell your position, locking in a gain of 30% profits for you.

Use Trailing Stops!

Everyone should use trailing stops. They benefit you in two ways: reducing risk and locking in profits. Trailing stops are a very important and useful tool available to traders and investors, but many traders do not use them. If you plan on being a successful trader or investor, trailing stops are an easy way to increase your profits and your chances of success.

Using Stop Loss Orders to Reduce Risk

Using Stop Loss Orders to Reduce Risk

First we need to cover 3 major questions about stop loss orders:

  • What is a stop-loss order?
  • Why should a stock market trader use stop loss orders?
  • How do I place a stop loss order?

What is a stop loss order?

A stop loss order is an order that you place through your broker that tells your broker to sell your shares if the stock price hits a specified price. When the stock price hits your stop loss price, the order will execute and your shares will be sold.

Why should I use stop loss orders?

Stop loss orders are used to reduce the risk you are taking on when you buy stocks. Stop loss orders will automatically execute when the stock price hits the lowest price you want to sell at. Generally, most traders will use a stop loss of 1-2% of their entire portfolio value. So that if the stock trade is bad, they’ll only lose 1-2% of their portfolio, which on a good day, a skilled trader can make this loss back plus more.

How do I place a stop loss order?

Placing a stop loss order will vary from broker to broker. Most online brokers have this order type in their normal order entry page. You may need to contact your broker for instructions on how to place stop loss orders using their system. With Ameritrade, it’s pretty simple. Stop Loss is one of the order types to select from.

An example of how a stop loss works.

You have $10,000 dollars in your entire portfolio. You buy 100 shares of XYZ stock at 10.00 per share. First, you need to calculate the greatest amount of money you’re willing to lose on this trade. The money we’re willing to lose is the amount of risk we are willing to take. Most daytraders are willing to risk 1-2% of their entire portfolio value. We will use 1% of our entire portfolio value in this example. The math is: (entire portfolio value) * (percentage of entire portfolio value we are willing to risk or lose). For our example, this will be $10,000 (total value) * .01 (.01 is the numerical representation of 1% – which is how much we will risk). $10,000 * .01 = $100. We are willing to lose or risk $100 on this trade.

Now we need to calculate the share price we want to set our stop loss at. You take the current value of your XYZ holdings, which is $1000 (100 shares times $10 per share). Subtract the maximum amount you are willing to lose from our XYZ value: $1000 – $100 = $900. This $900 is the amount of money we will have if our stop loss order executes. Now, take $900 and divide it by the total number of shares to get our price to set the stop loss at: $900 / 100 = $9. So, $9 is our stop loss price. This is the price you will sell XYZ at due to risk management of 1% of total portfolio value. If and when the price of the stock falls to $9, our stop loss order will automatically execute and sell your stocks.

By using stop loss orders, we know our risk and how much money we may potentially lose in a trade. Psychologically, we are prepared to accept the loss, since we know our sell out price. Stop loss orders reduce risk by limiting potential losses in poor trades.