Ready to learn how to select good stocks for short-term trading?
To select good stocks for short-term trading, one can use RSI2, RSI 30, over 20% gainers or losers from the previous day, and stocks within 20% below the 52-week high.
- Use Two-Period RSI
- Previous day stocks with 20% or more returns
- Previous day stocks with -20 or more losses
- Target profit
In this post, one can learn how short-term traders find excellent stocks, without holding it forever.
These stocks are not for the long term, but for just one to five days.
Because the period is short, traders need to look for the predictable signals and patterns.
The patterns are simple to predict, which may offer traders some profitable trading opportunities.
For example, there are three patterns above that is for day trading.
Although one may take at least three days to complete.
However, traders can choose at least two strategies, so that they can prevent over-trading.
Over-trading can lead to more losses, so it is important to avoid it.
Use Two-Period RSI
Two-period RSI is one of the best strategy for short-term trading.
The complete strategy is already available on this website, so anyone can search it.
It shows a buy signal when the RSI is below five and the price is above 200 MA.
There is also an advanced version of the two-period RSI, named the cumulative two-period RSI strategy.
However, there is a need to use a trading tool, for example, the Amibroker.
Amibroker is a powerful tool which traders can connect to real-time or end-of-the-day data.
When it has data, it can scan the stock market and other securities.
It can also optimize a trading strategy by suggesting the best settings for an indicator.
The setting for the relative strength index, in this case is two.
When the RSI is below five and the price is above 200 MA, there is a divergence between the price and the RSI indicator.
200MA is telling us that there is an uptrend if the price is above it.
However, in this price action, the RSI is telling us that the stock is going down.
Usually, this pattern is a signal of a pullback from an uptrend.
So, RSI2 is only for trading in an uptrend, although it is also a method also for short-selling.
However, I do not recommend short-selling because of the greater risk involved.
Previous day stocks with 20% or more returns
Stocks with 20% or more gain on the previous day are candidates for day trading.
However, this is not a trade daily because 20% or more returns are not available every day.
If one looks at the NASDAQ Advances and Declines, you can’t see these kinds of gain daily.
But what if a trader sees stocks like this? What should one do?
Well, the first thing to look at, is there enough volume a value?
Value is volume multiplied by price.
Traders need to calculate value to understand if their trade size is correct and whether they can easily get out of the trade.
Going back to the strategy, it is important to watch the price action at the open on the next day.
The traders usually look for an uptick and try to buy at the bounce.
They hope that the momentum from the previous day will continue at least for one hour.
What is the reason behind this stock behavior?
The reason is simple, there are many people who bought the stock on the previous day.
And more people will also buy in the next day because they see large green candle on the chart.
However, sometimes, the stock will go down, and traders should exit their positions at the first or second bottom.
This exit will help reduce the losses when the trade goes south.
Previous day stocks with -20 or more losses
Another strategy is looking for stocks that are down by 20% or more.
These stocks are suddenly down without actual reasons or news.
If one search for news, the news is just moderate and not really something extreme.
For example, the company missed earnings by 2% which caused the overreaction of the market.
However, if the news is about fraud, or something that is devastating to the company, it is better to avoid the stock.
In this strategy, the trader can buy the bounce from the first uptick.
It is the same strategy as the 20% gainer.
However, the trade is closed within the day, and we will discuss the target profit below.
Target profit is important because we are trading based on the previous day over reaction.
Over reaction often leads to buying opportunity for traders.
This also what we call the bounce trade.
However, because the stock is down so much, there is an upside potential.
How can traders estimate the target profit?
Well, one method would be by recording the range between low to high.
The common range maybe five to eight percent based on most of the experiences.
Eight percent should be the maximum from the first bounce.
First bounce is the first bottom after the first uptick after the market opening.
The first bottom is the recommended entry point for plus or minus 20% gain or loss from the previous day.
Previous day 20% plus or minus momentum may continue today because a lot of traders may trade the stock.
Many traders will trade the stock because they may like the strength of the previous day’s move.
The previous day’s move, which is 20% or can be a signal to predict the current’s day price action.
However, based on experience, less than 20% increase or decrease is not a good predictor.
To better predict the price move, one may only trade stocks not lower than what is a good rate of return.
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