The stocks you don’t trade are just important as the stocks you do trade.
Certain stocks and setups carry characteristics that can be extremely dangerous for all traders. Everyone slips up time from time, but limiting losses and errors that stem from bad stock and setup selection can be avoided by following this guide.
Let’s jump right into the 5 characteristics of stocks that you shouldn’t go near under any circumstances:
Low Liquidity/Low Volume
Getting caught in stock with low liquidity/volume is never fun or easy to get out of with minimal damage. If a stock has not traded sufficient volume for the day (~500k shares on the day is a good gauge) and has a very large spread, avoid it. You never want to get caught in a position with size that you can’t easily get in and out of a stock of without big slippage.
This video lesson will show you how to run stock scans in TC2000 to filter out and avoid illiquid names:
Major Press Release Coming or Earnings Soon
Sell the news is one of the most highly regarded and well-known proverbs on Wall Street. If you know a stock is coming out with some sort of major PR piece, FDA announcement, or earnings release soon, avoid it. Especially if you are looking to swing a position in a stock like this, it can be an extremely dangerous gamble. Taking a position in a stock before any of these events is pure gambling. Wait until the news settles out and the market digests it, then take the easy and simple trade in the direction of the newly established trend.
Range trading is tricky. Especially if you are newer, trying to play within tight consolidation ranges is a 50/50 shot. If you see a stock just consolidating for a long period of time, wait until it fully breaks out in either direction with volume and establishes a trend, then ride that momentum out of the consolidation. Just like this image below here shows, you never want to enter a stock in the middle of the ‘sideways consolidation phase, but right after the breakout when the volume and activity out of the range comes flying in.
Micro-Float Stocks/Float Rotation
If you are shorting a stock with a float under 10 million shares, you are playing with fire. Stocks with small floats usually are prone to float rotation, which is a devastating characteristic of a short squeeze that could trap you on the short side. Float rotations and low float stocks are easier to play into momentum on the long side, but still can be more dangerous as well than playing other slower-moving mid-caps/large-caps. If you see a stock float rotating and it has a very low float, look to avoid the setup altogether if you are newer. If you are more experienced, focus on longing into increasing volume at key support levels, but avoid the short.
This goes sort of hand and hand with the point we made above, but stocks that are crowded, pumped, or hyped up too much especially by the public or on social media should be avoided. Due to the amount of eyes on it, the price action is usually choppy and not natural. Random squeezes and dumps, usually these stocks are the most manipulated by algos and are ones to avoid risking your hard-earned money on.
If you want to learn more about our process for finding the best stocks to trade and how to trade them, apply for our Live Trading Boot Camp!