Often, too many indicators can lead to indecision and antacids. But there’s a more logical approach to finding a potential trade and plotting a chart using just a few indicators to answer some important questions you might have about what a stock may do next.
Step 1: Scan the Universe
Using Stock Hacker in the Scan tab of TD Ameritrade’s thinkorswim® trading platform, refer to Figure 1. There you can scan the world of stocks with your own criteria, containing the list of stocks to scan, your filters, and all the price data your heart desires. Then…
1— Choose the subset of stocks you would like to scan from the drop-down next to the words “Scan in.” There, you can see predefined categories as well as all your personal watch lists, and GICS classified industry lists.
2— Choose All Optionable if you only want to see stocks with listed options.
3— Select “Add Stock Filter” below the “Scan in” drop down to add a stock filter to the existing set of criteria.
4— Choose Last and enter a minimum and maximum price of the stock.
5— Now click the “Add Study Filter” button. Use the drop down to select the “Price Performance” group and choose “Price Direction.” The default inputs for this filter are “CLOSE” and “increased,” which we’ll keep. But you might want to increase the number of bars of data to more than 3.
6— Sort for the most heavily traded by choosing the “sorted by” dropdown to the left of the scan button. Select “Basic Price & Quote” menu and choose “Volume.”
The results will appear at the bottom of the screen like orderly soldiers. If you’re not happy with them, you can always edit the filters.
Step 2: Master the Universe
Okay, maybe not the actual universe, but you can attempt to determine where the stocks in your world are going by charting them in the thinkorswim Charts. Just right click on any symbol in the scan results and choose “TOS Charts.”
If you’ve never charted, you should try to answer three basic questions:
1— What’s the trend?
2— How strong is the trend?
3— Where do I get in?
To help us with these questions, we’ll add three studies: simple moving average, volume, and Relative Strength Index, and make a couple of minor adjustments to the parameters.
Referring to Figure 2, change your chart to a one-year daily chart. Then, from the studies menu in the upper right corner of your chart, add SimpleMovingAvg and RSI-Wilder. Click on the SimpleMovingAvg and edit the length of the study to 50. You don’t have to add volume since it is already turned on by default. However, if your volume isn’t displayed you can add it within the Settings menu.
Once you’ve got thinkorswim Charts set up, you can answer the three questions.
One: Is the stock clearly trading above the simple moving average (blue line in chart) or has it recently crossed above the line?
Two: does the indicator line in the RSI-Wilder cross from below the 30 line to above the 30 line recently?
Three: is the volume increasing or higher than normal (bars are higher than prior bars, indicating more traders committing to the trade)?
While there’s never a guarantee that a trend will continue, if you’ve answered “yes” to all three of these, then there’s a good chance you may have filtered for a stock or two smack dab in the heart of a bullish run. Happy trading!