I’m asked all the time by traders, “Rob, what companies should I trade? What companies do you trade?” Finding good consistent candidates to trade will be critical to your success. Today, let’s discuss the process for you to find candidates for you to trade.
The first thing I want to say about it is you can’t trade everything.
You’re not going to find the average person trading in Amazon at almost $2000 a share and trailing Sprint at $10 a share. The average person won’t do that, and it should not do that. You’re going to have a range of stocks that you’re comfortable with that you can afford to trade. Let’s talk about creating a watch list. Now, there’ll be three things that are critical to every watch list that you create.
The very first one will be stock price. Now, part of that will be predicated on what you can afford to trade, and what you’re comfortable to trade. You may say, “Rob, you know, I’ve done this for a little bit now, I’ve traded a few stocks, and when they get up above $50 or $70, yeah.
I get a little bit worried about that,” then you know you need a range lower than that. Where would your bottom be? Let’s say, your top was $70 where would the bottom be? “Well, I don’t really want to go lower than $30.” Great, you can now set up a filter to find that range of that $30 or $40-$70 of stocks that you’re looking for.
Trade Navigator has a great scanning feature to do just that.
There are other software programs that do it as well. This is the one that we use, the Pro-Scanner it’s called. Number one is finding stock price. You need to figure out what your stock price is going to be.
Number two is volume. Volume tells us how many shares a day are traded on this stock. Ideally, in a great and perfect world, I would not want to see anything under 1 million shares, and that’s my personal, the bottom of the volume is a million.
I don’t care how high it goes. Give me 100 million, that’s okay but not less than a million. I am okay for newer traders if they find stocks they like to go down and to maybe 750,000, but for me, it’s a million, so that’s number two.
Number three is the options price.
You see, I may look at a stock and the stock is trading at, let’s say, $35, but I see the option is trading at $14, $15 – that price may be too way too expensive for me, so that stock may work, but it may not be the right one for you. Lululemon is a great example right now. I like them as a company, I’m not saying anything about them.
Their options are a little expensive for the average person that wants to trade because they get up into that $15, $18, $20 range, and that might be more than the average individual, especially if you’re newer, is willing to put in the trade. Pick options that the pricing is not hurting your pocketbook.
Now, staying on the pricing there are two pieces in price, the bid and the asking price, and they’re both what the market maker sets up and says, “This is what we’re willing to offer you if you want to sell us your stock, and this is what we’ll pay to buy it.” The second one, the ask is this is how much money we’re asking you to pay to buy it for us.
If you look at an option and, let’s say, the option has a price of $2 by $2.10, so that’s the bid is $2 the ask is $2.10. If I said to you, “Which one would you want to buy the option for?” “Well Rob, I’d want to buy it for $2, if I had my choice.” Of course, you would. Which one would you rather sell it for? “I’d rather sell it for $2.10, the one that’s more money.”
Right. Now, bid and ask can be a little confusing, and I had to come up with these cutesy ways for me to remember all these things when I was a new trader.
Here’s what I did and, hopefully, this will help you. I want you to look at whatever the price is and ask yourself, those two prices $2 by $2.10, which one do I want? That’ll differ whether you’re buying or selling. Ask yourself the question, which one do I want? Whatever you come up with the answer is this, “whatever one you want you CAN’T’ have it!” You get the one you don’t want. The difference of that bid-ask is what the market maker keeps for their fee, their VIG for putting the buyer and the seller together in that trade.
You get what one you don’t want, that’s the easy way to remember them.
Those three pieces are going to be critical to choosing your options and your stocks and your components for what you’re looking to trade in your positions. That’s the process folks, you need a systematic approach no matter what you do. I gave you three steps, follow those three steps towards your own success because successful traders are educated, traders.
Instead of just plucking from the air a stock and saying, “Ooh, I’m going to trade this one because my buddy said it’s a good stock to trade you,” need to make sure you make an educated decision.
This was very interesting, but Quick question though, I’m curious the difference between insider trading and a trading scheme. Do you know the difference? My brother in law is a stock trader and I’ve been worried because of the recent crack downs. I really appreciate any advice you can give.
Insider trading is trading a publicly traded security based on information not available to the general public. This type of trading puts the trader at an unfair advantage and is generally illegal. We’re not entirely sure what you mean by “trading schemes,” but if you’re referring to boiler room style of investment sales (think Wolf of Wallstreet), we would suggest you keep away from that.
If you’re looking to get into trading stocks, options, or other securities for yourself, consider working with a reputable broker and you can avoid the potential problems that you highlighted.