All of the stocks shown in the video above have several things in common that I’m about to explain in detail. You may want to bookmark this page.
First of all, because I’m interested in making money sooner rather than later, I start by looking at stocks that are going up right now. In fact, the stocks I’m going to be searching for are members of the Russell 3000 Index that have had a total return in the top 10% of those stocks over the last six months. In case you don’t know, the Russell 3000 is an index with 3000 stocks in it. Who’d have guessed?
According to Russell, the stocks included in this index make up 98% of the investable U.S. stock market. An important feature of successful trading is investing in stocks that institutions like mutual funds and pension funds are allowed to invest in. The stocks in the Russell 3000 meet that requirement. We need the buying power of the big institutions to come in and push our stocks higher if we are going to make money sooner rather than later. Once you think about it, this makes perfect sense. If it doesn’t make sense to you, you may want to consider limiting your investments to mutual funds. (I’m kidding … kind of.)
Some of those stocks will go much higher in the next few months, and some of them will have peaked and will be going down. This is a tough concept for many people to comprehend: the fact that leaders will continue to lead … until they don’t. By the time a stock shows up on this list, it will have made a large move; however, many will go on to make even larger price movements in the next few months.
The next item I like to see is that the stock has made a new 20-day high in price. The idea here is simple. Before a stock makes a new one-year high, or a new all-time high, it has to make a 20-day high first (although a 20-day high can also be a new all-time high). That makes sense too, doesn’t it? A new short-term high leads to higher long-term highs?
We are not done yet because if you ran a scan that included just these items, you’d find yourself bombarded with too many stocks to examine. Since I have a life outside of trading, I need to add criteria to reduce the number of stocks that will be showing up on my list of potential trades somehow. This is where the fundamentals come in.
Fundamentals are things like sales, profit margins, debt levels, etc. In my opinion, the most important item in this group is the company’s growth in sales over the last 12 months. I like to look for companies whose sales are at least 10% higher than they were last year, the higher the better. When you stop to think about it, this also should make sense. Companies whose sales are rising fast should be going higher. The fact that they are showing up on this scan means that they ARE going higher.
Now if I could just find a way to guarantee that they’ll continue to move up in price … It’s nice to dream.
To review, I’m looking for stocks that may go up a lot in a relatively short time period. The stocks will have all of the following characteristics.
1) A total return in the top 10% of the Russell 3000 Index over the last six months.
2) The price will be a new 20-day high.
3) Sales growth of at least 10% over the past 12 months.
So, that’s it. When the software is done scanning (which takes less than a minute), I take a look at the results and will buy stocks from that list that I like the next morning. At this point I feel like every stock in the list of stocks produced by the scan has an equally good chance of going higher. In fact, I know they do.
One last thing before I end this post, picking the “best” stocks isn’t really the secret to being a profitable trader. All of the stocks passing the tests of my screening process stand a good chance of going much higher, but we all know that many will not. Being a successful trader isn’t about being the best stock picker; it’s about avoiding large losses. I’ve written more about that in the post called “Avoiding large losses, the key to successful trading.”