Stock Scanning software can be a great help and a time-saver when looking for new swing trades and day trades. One of the pitfalls with these software packages, however, is that they can be “too good.” And you’re probably wondering, “How can they be too good?”  Here’s how.

They are “too good” because they provide the opportunity for the user to add so much criteria and settings to them. The provider of the software does not know what you are looking for so it provides tools for everyone. Most software does come with “canned scans” to start out.

Most users think that if they can define the “perfect scan,” then they will be able to find a “sure-thing opportunity.”  That’s never going to be accomplished. Scans should be used as a “funnel” — so to speak — that brings you setups that are “Close” to what you are looking for.

It’s a balance — too many conditions and you may get nothing. Too few and you may get overwhelmed with ideas that many will likely be useless.

By keeping scans relatively simple, you can still cut down a huge amount of the stocks that don’t meet whatever your focus is. For example, if you wanted to trade low-priced stocks between $1 – $10, you could make that one of your criteria.

Of course, this is going to produce many stocks that trade low volume, so you would add criteria to say, for example, “that you want the volume to be above a certain level.”  Those two simple criteria would eliminate the majority of what you don’t want to see.

If you wanted to, you could add that you want stocks to be strongly trending – and you could break that up into trending up or trending down.

This is where an indicator can be helpful. I don’t use indicators on my charts to provide me signals of whether to buy or sell. For that, they are subjective and useless.

However, an indicator like the ADX indicator can be set to a higher level, which the scan will then provide you with stocks that are trending. The additional condition of a shorter moving average being above or below a longer also helps.

So once you have your relatively simple stock scan to get you in the right ballpark, you then start the manual scanning of looking through those symbols on a chart. Yep, manual labor. This is how I have done it for years.

If you have a method – and, of course, you should — that details the chart patterns that you’re looking for, it will take you less than a second to filter through each chart and decide if this one is “in or out.”

Here are a couple of simple scans that I use each day.

Stock Scan for Gaping Stocks at the Open

Above are two scans for stocks that are gaping up or gaping down at the open.  The criteria for them are very simple. The stocks have to be:

  • Gaping up or down more than 1% from yesterday’s close;
  • There is an increase in volume;
  • The average 90-day volume ranks in the upper 20% of all stocks;
  • The price has to be between $5 – 200; and
  • The stock has to be optionable.

That’s it!  Simple!

In the minder, I can see the percentage of the gap.  I can see whether the stock is trading above or below its opening price (check mark red or green), and the volume on the day and when it’s next earnings date is. The minders that you’re looking at are sorted by volume, but I can also sort them by the percentage of the gap, which I do at the open. The one with the largest gaps are always of interest.

It’s often thought that the stocks with large gaps are the ones that are going to reverse and, sometimes, they do initially. Historically, though, that weakness — or strength — at the open does follow through . The structure of the prices on the daily time-frame is going to have a lot to do with that. Let’s look at an example from Wednesday 4-12-17.

Fastenal (FAST) was in the Gap Down list and it gap down almost 5% from the prior close. The gap list is only a starting point that filters through thousands of stocks and narrows it down to a few based on my criteria. As you can see, there are 18 stocks in the gap down list. Other days there may be more or less, dependent on the direction the market gaps.

Part of what needs to be considered — besides the gap list is — is the gap of the broader markets.  For example, if the market had been going down for five days and was then gaping lower, the odds of a counter move up would be relatively high  — and, vice versa — if the market had been moving up for several days and then gaps higher, look for a retracement.

This day, the market didn’t gap very much, so it wasn’t much of a factor. However, Fastenal was gaping down significantly and it was showing relative weakness.

In the above chart of Fastenal, there are several points to be taken into consideration prior to gap. A potential Double Top formed, but FAST had not broken support.  Actually, buyers were stepping up over the last several months buying at that level; and they did that again the day before the gap lower.

So there’s a sideways consolidation that has formed over several months. Sellers were taking control in the $52 area and buyers were taking control in the $50 area. Then a Bottoming Tail (BT) formed that tells us without a doubt that buyers stepped up and pushed FAST higher into the close. Perfect for a gap lower!

Imagine you are one of those buyers and seeing FAST gap down 5%, which is a lot to lose overnight. What are you thinking to do? Are you shocked by the gap? Of course you are!  Everyone long the stock is in shock and in pain!

First, you might think, “if FAST can rally up a bit, I’ll be happy to get out of this Dog.”  That didn’t happen. If you view an intra-day chart, you’ll see exactly what I mean and how it set up to move lower.

Another consideration with gaps and any setup is if there is what I coined years ago as being a “Tradable Void”. FAST had that Tradable Void, which means there was “little to no support underneath.”

Considering the large overhead consolidation — that now has those that were buying there trapped, the Void below and on this day the market even began to selloff.  This is an example of multiple criteria within the Trading Plan coming together that started with a simple scan.

The gap scan provides day-trading opportunities.  The gaps may provide swing trading opportunities as well — Pro or Novice.

Another way that we use the gap scan is for option trades. Specifically, Credit Spreads that we look for every day. We have other scans as well, but the gap scan can provides a starting points for a multitude of trading ideas.

Here is one more scan that I use each day that looks for large red bars and large green bars. It’s pretty simple and, with the addition of a volume and price criteria, it will find quite a bit of what’s moving in the market that day.

Stock Scan for Wide Range Bars

As I previously mentioned, the scan is only a starting point and it’s the same with this one. Something else to keep in mind with this type of scan if you’re viewing it intraday, is what might be a large red bar may not be one at the end of the day. We saw that happen on Tuesday 4-11-17 in the Broader Market Indices. The large red bars that were seen in the early part of the day turned into Bottoming Tail bars by the end of the day!

My students know that these Wide Range Bars (WRB) can be “Igniting Bars” when coming out of the consolidation — or ending bars after a multiple bar move in one direction.  That is a major consideration and, when used properly, the high-odds opportunities are abundant.

You may have noticed that FAST is also on the Red WRB scan; however, I’m Not interested in FAST as a bearish -WRB for many of the reasons I was interested in it as a Gap Trade.

Again, the scan is a starting point for what may provide you with an opportunity. On Semiconductor (ON), it was also on the list and it did interest me.  If you look at the chart (not shown) on your charting software or website, you’ll see why.  Look at the symbols on the lists and see the differences in WRBs

My personal scans provide me a starting point each day (daily scans) and at the end of each week (weekly scans) — and at the end of each month (monthly scans) for day-trading, swing trading and intermediate-term holding ideas.

Of course, they are also used to provide subscribers of our Advisory Service recommendations. Take a trial of our Service which is filled with educational content as well as recommendations to generate income and wealth.  Hope to speak with you in one of our monthly meetings!

I hope you enjoyed and learned from this article. If you have questions, you’re welcome to email me at greg@mastertrader.com.

All the best,

Greg Capra