Watchlist Preparation: How to Choose High-Probability Stocks
This is how I trim down my watchlist to a few actionable names.
A major problem I faced as a beginner swing trader was narrowing my watchlist names to single-digit, high-probability names. Ready to break out at any moment.
Failing to do so led to indecision, lack of focus, and low-quality trading decisions. All of which impacted the portfolio negatively.
Therefore, narrowing my watchlist to a few manageable names dramatically improved my swing trading. This should be a high-priority action for you too.
How many stocks are too many?
Bullish market conditions may provide you with >50 setups while this number would reduce drastically during a non-bullish market.
Irrespective of the market conditions, your actionable watchlist should not have more than what you can track and concentrate on at any point. This number is different from person to person. For me, the sweet spot happens to be around 6-15 stocks.
In this article, I will show you how I trim it down to this manageable number of stocks.
Relative Strength:
I eliminate more than 90% of stocks by only looking at those which are outperforming 90% of the market in the last 50 days. Given that the total number of stocks in NSE is 2000, my effective watchlist starts with less than 200 stocks (10%). I transfer these stocks to my ultimate watchlist each weekend fresh.
Another alternate is to run a scan for the setup you trade. I trade High Tight Flags. Currently, my HTF scan gives me only 62 names.
The next step is to look for basic essential criteria for the swing setup. A prior uptrend is non-negotiable and I believe would be present in most of the names. Following are the additional criteria I look at:
Trading above all major key moving averages:
Strong stocks trade above 50DMA, while stronger stocks trade above 20DMA and the strongest of all would be trading above 5/10DMA.
So, I look at stocks that are consolidating above these MAs. It is best if the stock trades above all key MAs (10/20/50 DMAs) acting as support.
High Volumes on the up move:
Instead of just looking at the presence of an upmove, I look at the quality of the up move. How do you do that? By looking at the Volumes. Higher relative volumes on the up move tell you the stock's higher strength. I typically look for HVYs (Highest Volumes in a year) or HVEs (Highest Volumes Ever).
Conditions 2 and 3 should trim down your watchlist to half.
I trim it further by looking at the quality of the pullback/consolidation.
Decreasing volatility on pullback/consolidation:
A good base always has very little volatility. It also reduces as the base matures from left to right. I look for a) Tight daily closes which are 1-2% near to each other and b) a Daily range of less than 5%. The lesser the better. A daily range below 2% levels is a signal of an impending up move.
Decreasing volumes on pullback/consolidation:
Decreasing volatility clubbed with decreasing volumes is a killer recipe for an A-one setup. Strong stocks will not have strong hands. Strong hands don’t sell easily, so strong stocks will not have many sellers. Without sellers, you won’t find volumes aplenty.
If you still end up with a lot of names, here are 2 bonus tips I have for you:
High Relative Strength Group: Get rid of stocks that are from a low RS group/sector.
Bigger Base/Consolidation: look for a consolidation of at least 3 days. Anything above 5 days is preferred.
Watch this video where I make my swing watchlist for my private group HPA. I show the complete process of watchlist preparation from A to Z.
That’s all for today mate.
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