Stock scanners are great tools to help spot opportunities throughout the day. However, these tools can be detrimental if not used properly. It’s easy to spread yourself too thin and jump into any stock that pops up on the scanner. Remember, scanners are just filters that provide candidates that must still be validated through proper analysis. Don’t fall into the trap of jumping head first into any and every stock that pops up on the scan.
How To Use Scanners
First and foremost, you must be aware of what the scans are filtering for. You should also know what you are looking for. This will help to set-up your own criteria needed to quickly analyze the results. Scanners are meant to save time, effort and improve efficiency. The quicker you can analyze and prep the results, the greater the opportunity to profit. This means you have to define the steps and then work to minimize the steps to get from point A to point B in the speediest manner. By knowing what type of results you want, it wll cut down on the number of steps needed on your part to get to the trade.
Anatomy Of A Scanner Trade
Here’s an example of the full anatomy of scanner-based trade.
Determine Your Criteria
Let’s say you are looking to play a bounce on oversold stocks. You set the scan to find stocks that have fallen under the 20-band on the 15-minute stochastic. You have also set the parameters to stocks with daily average trading volume over two million shares priced between $20-$50 trading on the NYSE or Nasdaq exchange.
Analyze The Result(s)
From the results, you spot a familiar name XYZ, which is trading at 27.75, down – $2.20 at the lows of the day. From here, the work really begins. You will have to quickly analyze XYZ through multiple time frames to determine support/resistance levels, check for news, compare to benchmark index/futures (IE: S&P 500) to determine relative strength or weakness.
Your analysis reveals that XYZ is trading weaker on an analyst downgrade, but the sector/peers are positive and up trending on the day and the S&P 500 ETF (NYSEARCA) is trading up $1.20 and up trending. You have determined that XYZ is a viable candidate for an oversold bounce. The daily and 60-minute lower Bollinger Bands overlap at $27.40.
Plan Your Trade
At this point, you decide to take a total of 1,000 shares long for a bounce, but will be patient to get the best prices. The shorter time frames also show very oversold stochastic readings under the 20-band on the 5-minute and 1-minute charts. You place three limit orders to buy: 300 shares at $27.67, 300 shares at $27.53 and 400 shares at $27.43 with a stop-loss at $27.15 for a reversion target at $27.90-$28.10 range.
Execute, Monitor and Manage Your Trade
The SPY takes a dip and your limit orders at $27.67 and $27.53 get filled bringing your average price on 600 shares to $27.60. XYZ bottoms at $27.50 and proceeds to spike to $27.65. You notice the 5-minute stochastic turning back up through the 20-band and determine the oversold bounce has begun. You cancel the $27.40 limit buy order for 400 shares and proceed to buy 400 shares at $27.65, which brings your long position to 1,000 shares at $27.62 average. As the 5-minute stochastic climbs, the 15-minute stochastic also crosses up through the 30-band stochastic. The SPY is hitting new intra-day highs and the peers are also climbing. The 60-minute 5-period moving average resistance on XYZ updates to $27.85. You decide to scalp out the position just ahead of that resistance into the buyers at $27.82, for a + $0.20 price on 1,000 shares. Trade planned, executed and closed with $200 profit.
This is an example of how you create a trading plan and execute with proper allocation, targets and stop-losses. The quicker you can put the plan together, the more efficient your trading will be, not to mention the ability to jump on the opportunity in a timely manner. Optimizing the scanner results and the steps taken on your part is the key to success.
Basic Scanners for Day Trading
Intra-day High/Low Scan
Stocks making new intra-day highs and lows tend to have more robust price action. Be careful not to jump headfirst into these stocks as they can pullbacks almost immediately after they show up on the scanner. Keep in mind that if you haven’t been already monitoring the stock, then you are the “newbie” set of eyeballs. Poker players know that if they can’t spot “the mark” (victim) at the playing table, then they are probably it. Assume the same applies to trading and be sure to watch how the candidates trade first through a few 5-minute or 15-minute candles first before stepping into a trade.
52-Week High/Low Scan
These are good candidates for intra-day traders to play with the trend or for reversion trades. Swing traders can also benefit from this list at the end of the day to see if a stock is forming a new trend or showing signs of exhaustion.
The volume weighted average price (VWAP) is a ratio that measures the average paid price for the stock based on volume. This figure is dynamic just as stock prices are dynamic. Institutions and algorithm programs like to cross reference their purchase prices with the VWAP to determine how they fared on their purchase prices.
A stock is considered “red” when it is trading below its previous close, and “green” when it is trading above it’s previous close. When a stock goes from red to green, it can represent a shift in momentum that may provide a trading opportunity.
Since all trading is composed of volume, it would make sense that a spike in the trading volume would be a sign of potential voaltilty. Heavy volume indicates interest, which indicates participants. Both are necessary components for tradeable stocks. Looking for stocks trading on above average volume can help you identify potential trade setups.
Moving Average Crossovers Scans
Moving average crossovers indicate that a new trend may be forming and require a closer look. Run these candidates through other indicators to distinguish between just a wiggle and a true breakout/breakdown formation. The larger intervals tend to be more effective for determining trend reversals like the 50-period, 100-period and 200-period moving averages.
Stock Up/Down X% Scan
This scan reports stocks that are making large percentage price moves intraday. It’s important to make sure the candidates have decent volume with good liquidity. Since it is percentage based, cheaper priced stocks tend to show up more often, so it’s a good idea to specify a price range for the underlying stocks in the settings.
These stocks are either gapping up or down pre-market in reaction to news and/or S&P 500 futures. The most material news items are usually earnings reports, which are released every quarter. Make sure you are familiar with the underlying stocks and their trading behaviors. Even the thickest float stocks can move fast to earnings reactions. The key is to qualify the most tradeable candidates that have suitable liquidity, therefore it’s prudent to monitor them after the opening bell for at least 15-minutes.