My style of trading is almost completely short-biased. The concept of short selling has intrigued me since day one, and I have been perfecting my strategy intensively for the past six to eight months. Of course, at first, I was very naive in thinking that gravity must takes its toll on all stocks going up. That's a very dangerous game to play, and one I choose not to play anymore. Stocks can, and will, go up. I step up to the plate when perception of value and reality of value diverge in a serious way.
What causes Mr. Perception of Value to suddenly diverge from its cynical friend, Mr. Reality of Value?
Some of the most common are:
- A promotion/pump (paid or unpaid)
- An overreaction to news or some event relating to the company
- Sympathy to other stocks moving up in the same sector
These can occur alone or in any combination. There have been some prime examples of this divergence in the last year: Marijuana/Pot stocks, Body Cam stocks, and Ebola stocks, to name a few. Each of these groups of stocks that ran had some combination of the above reasons. Let's take a peek at how these charts ended.
HEMP (Marijuana/Pot Stock)
ISNS (Body Cam Stock)
and my favorite...
APT (Ebola Stock)
These are extreme examples of what I look for in stocks, but I think the concept is clear: ridiculously overextended charts that I have a high degree of conviction will come back down. It is simply a matter of being patient and letting the backside of the move commence. How and when I identify (or have to conviction to believe) that the backside of the move has begun is beyond the scope here, and to be honest, I don't think it would be of great value to explain that . The real way to grow as a trader is to experience things first-hand and learn. Success is gained by practice, trial-and-error, and self-perfection. Come up with your OWN ways to fix problems, your own innovations. Of course you can learn a general concept and "borrow" a style of trading from someone else for a while, but you won't OWN it until you add your own personal touch. There is nothing--NOTHING--wrong with trading based on someone else's style of trading, and I did just that for about a year. But if you want to get to the next level, you have to find your niche.
Creating a Watchlist
I have tried several different websites and platforms to scan for stocks, and my personal favorite is TD Ameritrade's ThinkorSwim (ToS). Not only are the charts great, but the built-in scanner is very customizable and fairly easy to use. It took me a little while to go through all the features and parameters but it was well worth the time. ToS is free for anyone who has an account open with TD Ameritrade. You don't even need to fund the account.
Once you install it, you can open it up and go to the Scan tab, as shown below.
I run several different scans, one for each price range (.01-$1, $1-$20, and $20+), and then one "safety net" scan that checks all of these price ranges. Each of these scans searches for stocks up over a certain % over certain time frames. They are all simple scans, and they do provide plenty of worthless set-ups. But I would rather sift through a few more charts and be more generic in my scan than be very specific in my scan and potentially let a good play slip through the cracks.
Here are the scans I use most often. If you have ToS installed, you should be able to open these scans in your platform. (UPDATE: If you cannot open these in your ToS, try clearing your cookies/cache, or use a different browser to click these links. Also, try opening the links with ToS closed, and with ToS already open. If they still won't open, I wrote another post HERE with the criteria so you can manually make these scans.)
- Short Scan for $1-$20 (most of my plays come from here)
- Short Scan for .01-$1 (I rarely play these, but every once in a while a great play comes out of it so its worth the extra effort to go through this)
- Short Scan for $20+ (rarely do I play these, as most of the results here are just slow, grinding daily charts that are up a lot. But like the .01-$1 scan, occasionally there are great parabolic charts.)
- Short Scan "Safety Net" Scan (this looks for stocks up a large amount in the last 1-20 weeks. It catches all the stocks that hit my other scans several weeks ago but just consolidated or stuck around near their highs. I use this for finding potential longer term shorts)
The majority of the results from my scans are charts that I'm either not interested in playing at all, or charts that might be decent in the future because I want to wait for them to go higher. If I think they might set up in the next couple of days or weeks, I pull up the charts and set price alerts with my broker. I just eyeball price points where if the stock somehow got to that price, I would be very interested in shorting it. That way, if I am monitoring other setups and the stock gets to that area of interest, I get an alert sent to my phone and can pull the chart up right away.
As an example, say my scan gives me 50 results. About 20-30 of them are charts I'm not interested in at all. Of the remaining tickers, 5-10 of them are ones I feel are getting very overextended. After narrowing it down to this amount, I pull the chart up and run through the recent company PRs and SEC filings to see if I can get a general idea of why the stock is up. If I see no PRs or filings at all, then its very likely that the stock is being pumped and there is no legitimate reason for it to be up at all. If there are PRs/filings that seem generally positive and explain why the stock is up, I try to evaluate if the PR is fluff or not. For me, it is always very important to know and understand WHY a stock is up. It helps me form my idea of where the reality of value lies, approximately. If I don't understand why, I have no problem avoiding the play. (Side note: as a general rule of thumb, over-extended earnings winner charts tend to take much longer to pullback and won't pull back as far, so they usually aren't my main watches.)
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Here are some hypothetical examples of charts I come across. The blue line (perception of value) is always going to be where the stock is actually trading at. A stock’s price depends entirely on what people are willing to pay for it. In other words, it depends on what their perception of the value of the stock is. With all these charts, the potential profit is represented by the distance between the blue and the red line. The greater the distance, the more I salivate at the thought of shorting the pig.
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1) The arrow represents a catalyst for this stock. It could be a worthless PR, or a paid promotion, but clearly it caused the price to skyrocket. Yet the reality of value didn't move up AT ALL in response to this catalyst. This means that the catalyst was completely worthless and the stock will inevitably fall back down: it's just a matter of time. Float rotation and a lot of trapped shorts might cause the stock to stay up much longer, but it will inevitably come back down. The potential profit here is enormous, and it is a play I cannot and will not pass up.
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2) The arrow, again, represents a catalyst for this stock. This time it is slightly different, because although the price did skyrocket due to this catalyst, the reality of value moved up slightly as well. The potential profit here is still very large in this example, but not as large as the previous example. I would definitely keep this kind of chart at the top of my watchlist.
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3) In this example, the stock has been in a clear uptrend for several months. This uptrend is, for the most part, legitimate because the reality of value is rising as well. But in late April, the perception of value diverged from its reality of value. The potential profit isn't too big here, but it is probably worth a scalp, as the stock will most likely return to its previous average distance from the reality of value line. These are good stocks to watch as well, and I play them just to fill the time while I wait for charts like example 1 and 2 to set-up. These are solid target-practice setups.
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4) In this example, the stock had some major catalyst in early April that caused it to skyrocket and make new highs on the daily chart. But notice that the two lines didn't diverge much, even though the stock shot up. This is where shorts can get trapped. They believe, as I once did, that just because a stock is up, it must go back down, regardless of the reason that it is up. That line of thinking just doesn't work in this case, as the catalyst in this instance was VERY legitimate and the stock may continue higher and higher. IMPORTANT: this example CAN turn into example 3 due to a squeeze of the shorts who thought it must go down right away. I always keep these tickers on my watchlists and check on them every few days to see if they squeezed much higher and the 'lines' did diverge.
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Quick summary - Example 1 Charts are my absolute favorite. They don't come around often, but when they do, they are at the top of my list. Example 2 Charts are my next priority on the list. Example 3 Charts are the lowest priority, and I will play those only if there are no Ex. 1 or Ex. 2's to play. For the most part I just avoid Example 4 charts, which are frequently earnings winners the first day or two following earnings. But if you throw in enough stubborn shorts in the early days of an earnings winner and a pumper/guru for good measure, they might just morph into an Example 2 Chart.
How can you be sure where the reality of value lies? Can I just give all the answers away? No, that defeats the purpose. You have to learn that by experience. Observe several overextended charts and see which pattern they fit into. Keep them on watch for a few months and see what they do. Then go back and study the initial catalyst for the stock, and see if you can make any connections. It takes time and a lot of effort, and I am by no means finished in my journey of understanding how to find the reality of value of stocks.
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After narrowing the list down even further from the quick "research", I put the tickers into my "Monitor" Grid, which is just a grid of 15-minute charts for 8 tickers. It gives me a bigger picture of what the stocks are doing, and if they start to set up for a play I just put the ticker into my 1-minute charts. (You can download this Flexible Grid if you want HERE)
In addition to the scans I run after the market closes, I also keep an eye on the Largest %-Gainers during the day. The top one is for stocks $1+ and the bottom is for stocks .01-$1.
All of these tools I use in ThinkorSwim are really just free alternatives. EquityFeed has all these features for scanning and more, as do many other paid platforms, I'm sure.
Keep in mind that this is just my style of trading. Maybe it will help you, maybe it won't. But the key to getting to the next level in trading is finding who you want to be. Evaluate what kind of trader you want to become. Just because this style of trading works for me doesn't mean it will work for you. I've tried to mold myself to fit other styles of trading just because I saw others be successful in that style, and it didn't work. In fact, I probably lost more money trying to become someone who I am not than trying to find who I really want to be.
Thanks,
Nikkos (IU: Nikkorico)
Thanks,
Nikkos (IU: Nikkorico)
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