Developing a Watch List

By: Oliver Velez

The following is an excerpt from Oliver Velez's Strategies for Profiting on Every Trade

There are many different styles of trading, and different traders prepare for the market in different ways. Most traders who do more than micro scalping start off the day with some kind of watch list. This list and its preparation will vary greatly. Here are some ideas of different ways to prepare for the next day.

You will want to look at daily charts after the market closes. If you are swing trading, you live off of the daily charts. If core trading, you live off of the daily and weekly charts. Even if you are intraday only, you will put the odds more in your favor if you have multiple time frames all going in your direction. In other words, even if you were trading intraday, would you want the stock you are playing long to be a short set up on the daily? Of course you wouldn’t. It’s a good idea to start with a list of long stocks to play long, even if intraday. If you trade from a small universe of favorites, at least categorize each trend as up, down, or sideways.

The first list that is the easiest to develop is of favorite stocks that you play every day. This list may include as few as 4 or 5 stocks, or up to 30 or 40. The number does not matter: the point is that the list consists of a handful of stocks that the trader knows very well. Many traders are successful doing this. There is a big advantage because they are familiar with every stock on their list. It is likely that they all trade well, are heavy volume, and easy to get in and out of without much slippage (paying more than the strike price to get into a long position because of the bid/ask spread or small volume on the offer). There is also a big disadvantage. You will miss many strategies that day. Your small list will not often have a mortgage play, or a nice bullish gap surprise.

Another easy list alternative is to have someone else do most of the work for you. For example, there are Pristine chat rooms and Pristine ESP, Pristine’s real-time scanning tool, that provide end of day lists of stocks. Any of these methods simply involve you looking at the picks and following the ones that meet your trading plan requirements. This is all in addition to the scans that are far too numerous to mention here. These scans are used to find set-ups for the next day on daily and weekly charts, as well as real-time intraday scanning with alerts. Using Pristine ESP alone will give you more play suggestions in whatever time frame you are in than you will ever likely need.

The third type of list would be one that you generate yourself based on the patterns you want to find. It involves scanning stocks one by one until you find a pattern that matches a strategy you want to watch the next day. This method is what we will focus on next.

To review a list of stocks to produce a watch list for the next day, you need to have a list of stocks to review. There are about 9,000 stocks and it would not be an easy task to look at 9,000 stocks every night. So we need to have a master list of stocks that we will look at to pick our watch list. We call this our “universe of stocks”. There are two different ways to create your universe of stocks.

First, you can compile several indices you like to follow. If you like tech, maybe you start with the NASDAQ 100 and then add the Semi Conductor Index (there will be some overlap in many indices so your total will be less than the sum of the two indices). Maybe add the Dow, and then perhaps a few stocks you like to play. You may end up with 100 – 500 stocks in your universe.

Second, you can create a universe of stocks by starting with the entire market and then using software, scan and eliminate certain criteria. For example, if you just use two criteria such as stocks that do over one million shares a day and whose price is over $4.00, you will be down to about 400 – 600 total stocks, of which 200 – 300 will be NASDAQ stocks.

The second way, scanning, has both advantages and disadvantages. By scanning stocks to obtain your universe, you will have a different list every day. Some new stocks will join as their volume meets the requirements, some will leave as they slow up in volume. So scanning will allow you to automatically see the up and coming stocks. This is also the disadvantage because you will have stocks entering your list that you have never seen before. Playing these often results in problems if you do not study them first.

Once you have your universe, it is simply a matter of scanning through the list every night to look for the set ups you like. Once you have some experience, you should only look at each stock for a second. If the pattern does not jump off the page at you, it is not likely to be a good one.

If you want a simple way, which takes minimal time, to manage your watch list if you are swing trading, try the following: on the weekend, review your list and look for the stocks that are defined as up-trends and downtrends. For an uptrend, look for stocks that have higher highs and higher lows, and have rising 20- and 40-period moving averages. For the best trends, look for the 20 to be above the 40 and keep a smooth, consistent distance apart. For downtrends, look for the reverse. Put these in two lists with those names. Then, every night, look through the uptrend list for stocks that have 3 - 5 days down (3 – 5 lower highs, preferably 20 – 20 bars). Look through the downtrend list for 3 - 5 higher lows. You will then have a watch list that has the first two important components of a successful trade: a trend and a pullback.