Three Ways Active Traders Use Stock Screens

stock screener

One of the hardest aspects of trading can be coming up with ideas. Abandonment of an investment thesis in order to participate in the market can lead to very toxic transactions. In today’s market of low volatility and volume, this is especially true. This blog post looks at several ways traders can use stock screeners to help generate ideas.

Price Spikes

  • One of the most basic ways a trader can use a stock screen is for price spikes. When a stock shoots higher, the market is simply either acting efficiently and inefficiently and trading opportunities are available in both situations.
  • When the market is acting efficiently, a fundamental piece of data has hit the market, changing the value of the company. Traders can take advantage of this action by peddling shares between investors who are trying to determine the true value of the company. For example, if a trader notices several big institutions trying to dump off shares as quickly as possible, the trader can grab those at a discount and sell them to retail traders who have a higher value on the company.

The case of a price spike as an inefficient market movement may be triggered by algorithms acting up or a fat finger order. When this is the case, traders can capitalize by correcting the inefficiency themselves or by providing liquidity to others trying to correct the move.

Unusual Options

  • For the most part, unusual options activity acts in a similar way to price spikes, but there are several situations that options activity can identify that common stock does not.
  • One example is possible insider information. Before a big announcement is made (eg. an acquisition), it is not unusual for options contracts to trade as people with illegal information on the situation try to capitalize on the move (despite the obviousness of the move, far out of the money calls and puts trade).

Traders can react by either adding a position on speculation that news may be coming, or selling liquidity to investors speculating on the probability of a deal. When trading stock on this kind of data, out of the money options can act as a much needed hedge in case fundamental news is released against the position held.

Momentum

  • One of the few forms of market inefficiency that has been proven to consistently work in academic study is momentum. The reason this works is because traders stick with a stock that is going up and limit their downside by selling the security as soon as the price starts to move against them.
  • A good method for trading this strategy is having preset risk to reward ratios in mind. For example, if you project a stock that started moving higher to pick up an additional two percent, you would automatically sell the stock at a 0.2 percent peak to trough pullback. This ensures that if you are wrong about the direction of a stock, in the worst case scenario (the stock reverses the instant you buy it), you only need to get one of nine picks correct to make a profit.

There are several ways momentum can be measured. The simplest is to look for new highs over a certain period of time (ie. new 52 week high, intraday higher, etc). Another method is to screen for stocks trading at a certain percentage of a high (ie. a stock at 90 percent of its 52 week high). When a short term moving average crosses above a longer term moving average, or an exponential moving average crosses above a simple moving average, this is another indicator of momentum.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

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