This article for eTrading sk was written by: Peter Saro

For an active trader, but pretty much for every participant on the stock market, stock selection presents crucial part of the job. As a trader you want to be involved in active stock with decent moves history and high interest from other market makers instead of boring stock that rarely moves what can lead to your frustration and makes you do illogical, not very smart trades when you see what you want to see but what in fact is not there at all.

As the very first step in stock selection it is very important to realize what your level as a trader is. If you are a rookie with few or none experience than you are a rookie. Do not ever try to make some leaps in your trading career. Trying to copy experienced traders, trading what they do will kill you really fast. Every successful trader was trying to do the same thing. But it took them only few moments to realize that it is out of their league. So they started all over again with very basics. That is why I separated beginners from more experienced traders:

Stock selection rules for beginners

When you begin trading you should focus only at one stock all day long for couple of days, even couple of weeks. This will help you understand basics like:

• how the stock reacts right after open?
• when it is the best time to start trading after open?
• what periods of a day are the most active, what periods of a day the stock is dead and you should try to avoid any trading at that time?
• is your stock following the market and if yes, how big the reaction is?
• you will learn the levels where the support and resistance in your stock are and how your stock reacts when it gets close to these levels.

Learning these aspects by watching only one stock will help you establish good habits that you will apply to any new stock you decide to trade. Later on you will be able to see similarities in the way different stocks trade and this will help you to adjust to new stocks much faster. Once again this is very slow process that you cannot skip if you want to be successful.

So here is what beginners should look at:

1. Price – any stock over 100 USD is becoming more and more difficult to trade. The price range you should be looking at is anywhere between 10/15 to 70/80 dollars.
2. Volume – volume presents the amount of shares that your stock has traded in given period of time. You should consider stocks that trade over 3-4 million of shares on average per day. The bigger the volume the more opportunities you have to close your position in case you are wrong. Based on volume we separate the stocks on so-called thick – with high volume and light – with low volume.
3. Volatility and Correlation – volatility is measured by beta and is in direct relation with volume. Beta shows you how your stock reacts to market moves. If beta is one that means your stock is 100 % correlated with market, if market moves 1 point, your stock moves 1 point the same direction. Shoul Beta be 2, it would mean that the selected stock moves twice the speed in the same direction as the market does. Generaly said: If beta is positive your stock moves in the same direction with market, if it is negative than your stock moves in opposite direction. Volatility in thick stock is lower than in light stocks because it takes much bigger push from market makers to make stocks move drastically in one way or another. In light stocks even pretty small buying or selling interest can cause the stock to breakup or down from given levels. I would suggest Beta anywhere between 1 to 2 levels in case you have just began trading.
4. Day range – as mentioned earlier you do not want to get stuck trading stock that does not move. Think about it this way – as a beginner you should start trading with the lowest possible amount of shares which is 100 shares position size. If you get long (buy) and the stock moves one cent in your favor you have just made 1 dollar. If you choose to trade stock that had daily range of 30 – 40 cents you are limiting your profits (future profits because at this stage you should focus on learning how to trade and forget about making money as a beginner). So if the strongest up move during a day is 20 cents your max profit in the biggest move of a day is only 20 dollars. And there is a chance you will miss this move what will lead to your frustration, anger and cause you to make stupid trades. That is why I would suggest you to try to pick the stock with range anywhere between 2-3 dollars on average per day. There is also a risk of a higher loss, in such case, but you should always use the Stop Loss, to protect your investmenst.

Once you take these measures in consideration it is time to pick particular stocks. I would recommend you two sources of help in this case.

First of them is the Chart. Looking at the chart will give you very clear picture about history of the stock, you can see where levels are, what the volume is, how smooth the moves are etc. But this is only when you know the ticker (symbol) of your stock that you have to put in chart.

Second source of help is Deluxe Stock Screener that you can download on MSN. After putting in your selection criteria it will run the search for stocks following this criteria. And the results show you also the ticker.
If you want to find out what stocks and sector SPDR to look at for your chosen stock, checkout the website SPDR Index where is link to correlation tracker. After typing your stocks symbol it will show you stocks and sector SPDR that have the highest and lowest correlation to your stock. This information will help you set up the chart with your stock and other ones from the same sector so you can more easily see who is leader and laggard in the sector.
I would suggest you to find out if your stock is a component of certain index or HOLDRs - trust–issued receipts that represent your beneficial ownership of a specified group of stocks. If it is than try to find out other components and what the percentage weight of your stock in this index or HOLDRs is. For example RIG – Transocean, Inc. is a company providing drilling for oil services. It is component of OIH  - oil service HOLDRs. Other OIH components are – e.g. Haliburton (HAL), Baker Hughes (BHI), Schlumberger (SLB) etc. This information will help you to establish chart with strongest components, find out what weight of your stock in given component is and to realize relative strength of your stock.

Last advice for beginners

Many trading platforms provide service called filter which select the stocks that are moving the most right at that time. I would not recommend this for beginners because it will only take away your focus from your main stock, it will make you to get involved in stock that you do not know how they trade etc. All in all it is very risky for you.

Stock selection rules for advanced traders

After couple months of trading you will know what your level of risk tolerance is, you will know whether you prefer thick and slowly or light and very fast moving stocks, you will know if you are momentum trader or incline more to position trading. As more experienced trader you will also know how different stocks trade, what to expect from them. This ability will give you more room in trading more than one stock per day. Even as more experienced trader I would still suggest you not to go crazy about how many stocks you trade per day. 3-4 stocks from the same sector will give you plenty of trading possibilities throughout the day.
Be aware that best, most experienced traders have basket of 10 – 15 stocks that they analyze on daily basis trying to find certain pattern that they are familiar with. Once they find such a stock they focus mainly on this stock (in many cases it is just one stock) what helps them to avoid distraction from looking at too many stocks.
Part of selection rules for advanced traders is also earnings season stock selection. We will look closely at this in theme Trader‘s day.

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