Section 4: Stock Screening

Author’s note: The original online training course contained an elaborate chapter on stock screening, a process in which you would begin with a list of several hundred stocks, and then analyze this list to narrow the field to a more manageable level that can be traded. This chapter has since been replaced by the one contained herein, as the new Vulcan Oracle performs this process automatically and instantaneously.

Screening is a method of formulating a list of stocks that you watch every day; it is a method of narrowing the field. One reason this is important is that following all stocks on the major exchanges would be too cumbersome, if not impossible. For instance, the NASDAQ alone contains over 7,000 stocks; the NYSE contains several thousand more. Not only would you be unable to properly study each stock, in actual practice, only a relatively small number of these get most of the market action, and even a smaller number than that are worth trading.

Screening narrows the field, making your list more manageable. Your goal is to reduce the number of stocks that you are watching to only a few hundred.

Introduction to the
OracleTrader

See OracleTrader on this web site.

The theory behind the OracleTrader is that the price and volume action of a stock, when interpreted properly, reveals the most likely behavior of that stock in the near future. The common term that describes this theory is called technical analysis.

In the broadest sense, technical analysis is the study of stock charts patterns, which many traders claim can predict the stock's most probable future behavior. This differs from fundamental analysis, or the study of the underlying company itself—earnings, cash flow, future growth, etc. There is much debate in Wall Street circles about the pros and cons of technical versus fundamental analysis, but as a rule, short-term traders tend to rely on technical analysis, while long-term investors tend to pay more attention to fundamental analysis. For the purposes of trading, we will mostly concentrate on technical analysis.

Although technical analysis has gained more popularity amongst investors in recent times, it is often criticized by traditional financial advisors who rely purely on fundamentals. Some of these advisors have even equated technical analysis to reading tea leaves and fortune telling. However, those who make such analogies not only misunderstand technical analysis, they do not realize that the basis behind all stock chart patterns is the very fundamental information that the analysts so covets.

In other words, the power behind technical analysis is the fact that everything there is to know about a company, its past, present and future is reflected in its stock chart. This is because the price and volume action is essentially a composite “poll” of every investor and trader that is trading the stock.

Hence, the price and volume action (which develop specific, recognizable patterns) will theoretically reflect all possible information that is available to everyone trading the stock, including professionals, insiders, and even the very analyst who doesn’t think chart patterns are important. When interpreted properly, how could there be a better source of information than the stock’s chart patterns? It is quite literally the same as employing tens of thousands of top-notch investors, working for you every minute. In this respect, the true “oracle” of the market is the historical pattern of a stock, as well as its current action in today’s session.

Downloading

If you have not done so already, you can download the OraleTrader from our download page.

The Oracle Engine

If a stock chart pattern reflects the composite opinion of all traders and investors, the obvious key would be the proper interpretation of this data. This is where the OracleTrader comes in, because its sole purpose is to interpret a stock’s price and volume action in order to evaluate its most probable, future path.

During the development of the Oracle, tens of thousands of charts were analyzed by the computer to determine what patterns were the most influential in determining the stock's future behavior. Beginning with all of the most popular indicators used by traders, our researched narrowed it down to a handful of technical patterns that were truly influential to the stock’s future behavior. The result was a highly reliable rating system for stocks, purely based on its most recent chart data.

A typical list from the OracleTrader shows above. The rating system, although
appearing rather simple, is the result of thousands of computations every minute.

The Oracle works with real-time market data to rate several hundred stocks at once, revealing the “best” and the “worst.” On the surface, the rating system might appear overly simplistic, but behind the scene, thousands of factors are being evaluated and weighed every second, and the best possible choices for trading are presented in various lists.

Types of Lists

The Oracle provides several choices of lists, and the list you should choose will be dictated by the market conditions as well as your own, personal trading styles. Much of this will be covered in later sections. For now, you can familiarize yourself with some of the various lists provided.

Technical Indicators. This is the most general list, and it rates all stocks by several technical indicators. Generally speaking, the higher the rating, the more likely the stock will advance higher; the lower the rating, the less likely. Very negative ("red") ratings would indicate a likely decline.

Gap Up / Gap Down. This is only available during pre-market and after-hours trading periods (before the opening and closing bells). A gap down indicates a stock that will be opening lower than its previous close; a gap up will be a higher opening than its previous close. More often than not, stock that opens substantially lower or higher than its last closing price will "bounce" the opposite direction. Traders can use this information to play a rapid bounce.

Longer-term Outlook. This list is useful for longer-term trades. Stocks in this list are rated for both the likelihood and reliability of moving in a certain direction during the next several days, weeks, or months.

Trap Door. This is one of the most popular lists, and it allows you to immediately identify a stock that suddenly spikes lower or higher very rapidly. Traders can "exploit" this spike by playing it for a fast recovery.

Rolling Channel. This list reveals the stocks that trade the most consistently within a fixed price range, or a channel. Stocks that trade in a channel, bouncing between prices, can be traded with a buy-low-sell-high strategy.

Using the Oracle

The primary function and purpose of the Oracle is not so much to pick specific winners, but rather, to screen stocks. By screening is meant to begin with a list of hundreds of stocks, then reducing that number to a more manageable list through a process of elimination. In this case, the Oracle applies its dynamic rating system to narrow the field down to 20 or 30 stocks that are the best candidates to make a strong move in one direction or another.

Those who have been using our web site for a while will fully appreciate the significance and power of such a screen. Prior to the advent of the Oracle, we would essentially screen stocks by manually. Typically, we would begin with about 300 stocks, then sort by various criteria throughout the day (such as volume increase or a sharp rise in price), then walk through the top 20 or 30 and pick out the most promising choices. By comparison, this manual method was both slow and inaccurate. The Oracle, however, not only performs this process instantaneously, it screens over 1,500 stocks, and in real-time, as the market moves.

Throughout the remainder of this course, we will be referring to the OracleTrader when it relates to a specific trading technique or strategy.

The primary function of the OracleTrader is stock screening. By applying its real-time rating system to 1,500+ stocks at once, the Oracle instantly narrows the field to a handful of the most promising trading prospects at any given moment. Hence, your time is only spent on analyzing a small number of potential trades, as opposed to the necessity to walk through several hundred stocks manually.

Alternate Screening

It is highly recommended that you use the Oracle for all your stock screening. But since the Oracle is fee-based at Garsworld.com, it is possible that you will need an alternative method of screening stocks should the software become unavailable and/or if you no longer subscribe. The following section describes how to screen for stocks manually. This is an optional section of this course, and you can skip in for now if you plan on using the Oracle for screening.

First Step

Your first step in creating a manageable list is to eliminate all stocks that fall outside of minimum and maximum ranges. Assuming that you begin with a giant list of all publicly traded stocks on the NASDAQ and NYSE, you would reduce the list as follows.

Exclude any stock under $8 per share. This will immediately eliminate about 1/3 of all stocks on the two exchanges. Why $8 per share? For one thing, cheap, "penny" stocks are too volatile, and frankly, too dangerous to trade. But for another, most institutions (mutual funds, pensions, etc.) won't even consider owning stocks under $8, and often not even under $10. Remember that successful trading means betting on the speculators, and the institutions are the most powerful speculators in the business.
Exclude any stock over $75 per share. This will eliminate another large percentage of stocks. This is a personal preference, and you can adjust this parameter to fit your own taste (if nothing else, you might need to adjust this number higher if a new bull market begins, in which case, some of the best stocks will exceed this price). The reason to set a maximum price is mainly to narrow the field, but a secondary reason is that stocks below $70 will tend to give you better trading action.
Exclude any stock that trades less than 200,000 shares per day (average volume). This will reduce your list dramatically, especially when combined with the minimum and maximum prices. There are thousands of stocks on the NASDAQ and NYSE that trade below this volume threshold, and you are better off without them. Thinly traded stocks are not only too volatile to consider, it is difficult to buy and sell them quickly (and, if you had a very large trading account, you wouldn't be able to trade them without moving the price against you).

After screening all the stocks on the NASDAQ and NYSE with the above criteria, you will have eliminated 2/3 of the field, which as far more manageable. We will refer to this list throughout this course as the Basic List. From this point, you will create even smaller watch lists by using fundamental and technical analysis applied to these stocks, which we will explain in the next few pages.

Watch Lists

A watch list is a term we will be using to describe a list of stocks that has been narrowed to a tiny handful, usually 10 or less stocks. The watch list contains stocks that you are, well, watching, and it is from this list that you make real trading decisions.

A watch list differs from a trading list, both in size and in use. Trading lists are used on an ongoing basis, and they consist of a few hundred stocks that are potential candidates for your watch list. In other words, you screen your larger trading list to come up with the best candidates for trading during the day.

Watch List Types

There are basically two types of watch lists you will formulate each day, and each of these lists are derived from your trading lists (your trading lists are larger lists, consisting of a few hundred top trading stocks).

Daily watch list. This is a list that you develop before the market opens, or the night before. Generally, these stocks will be the ones you will be certain to keep your eyes on during the next trading session.
Intra-day watch list. This is a list that you form during the day, while the market trades. This list will help you zoom in on opportunities that you may have missed in your daily list, or surprise opportunities for quick in-and-out trades.

Why use two watch lists? For one thing, each of these two lists serve a slightly different purpose. Your daily watch list narrows the field to those that you are certain to watch all day, while the intra-day list presents opportunities for quick trades during a smaller period of time (say, in the early morning action only, or late-day action, etc.).

But there is another—and perhaps a more significant reason—to use two different watch lists, and that is to prevent missed opportunities. The daily watch list, for instance, zooms in on stocks that you really should be watching that you might otherwise miss if you only formulated an intra-day list. The intra day list, on the other hand, locates opportune trades that you could have missed on your daily list, etc.

In either case, both lists have one thing in common: you trade the stocks on your watch list, and only on your list. It is this narrowed focus that greatly increases your chances of success!

Technical Analysis