Practice plan - Step 2. The trading process; Part 2: Hunt for good stocks

Hunt for good stocks - part 2 of the trading process.

I will be monitoring 3 classes of stocks:

1. Tradable stocks - as measured by liquidity, price level (in light of my account balance), and spread.
2. Stocks to watch - tradable stocks and stocks that may present potential trades if they move the right direction.
3. Potential trades - stocks that are ready to trade, pending a review of the market conditions.

Mr. Faith outlines basic market mechanics (repetitive patterns in the markets and the psychology behind them), suggests a strategy and idealized model for swing trading, and then shows some practical application. This is the gist of the 'whole brain' trading idea - allow the left brain to idealize the model (which it excels at), and let the right brain do the practical application (which it excels at).

I tried to apply his rebound strategy to day-trading charts, but I couldn't find any charts that actually worked (my left brain activity for the afternoon). So I decided to adopt two of Scott's strategies: FNG's The Finger and one that I am calling The Breakout, and apply the same principals: find the idealized model and let the right brain have at it next week.

To re-cap The Finger: Enter long on a stock that is hitting new highs. Enter short on a stock that is hitting new lows.

How does this apply to monitoring? Nothing new here: 

1. Tradable stocks: liquidity (> 800,000 shares daily average), price level (< $100/share), spread (up to $0.05).
2. Stocks to watch: tradable stocks with daily average price movements >$2.
3. Potential trades: stocks nearing/hitting new high/lows.

Not a lot for the intuition to do here, but not a lot for the left brain to do either - these can all be used to set filter criteria; letting the computer do what it does best: left brain activity. Intuition will come into play on the definition of new highs/lows: glancing at charts - is the stock approaching a new high/low? Easy to evaluate visually. 

The Breakout:  Enter long on stocks breaking thru resistance, enter short on stocks breaking thru support.

For monitoring:

1. Tradable stocks: liquidity (> 800,000 shares daily average), price level (< $100/share), spread (up to $0.05).
2. Stocks to watch: tradable stocks with daily average price movements >$2.
3. Potential trades: stocks showing resistance/support.

Again not a lot for the intuition to do - but there is a little: is the stock setting up resistance/support? The question needs to be answered visually and quickly or I need to move onto the next stock. 

During practice, I will be more concerned with timeliness rather than right or wrong. Again, key to letting the intuition take over is time. Too much time and the left brain tries to analyze.

(Note: This is drawn from the ideas presented in Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader. Mr Faith endorses swing trading, while this is my attempt to apply the same ideas to day trading.)