Stock Rating System for our Watch List
A Quality Characteristics
Gap more than 10%
Float less 20mil shares
Short Interest greater than 10%
Good Catalyst (news, earnings, etc)
Hot Stock with lots of Retail Interest
Pre-Market volume above 150k shares
Flagging near Pre-Market Highs
B Quality Characteristics
Gap less than 10%
Float between than 50-100mil shares
Short Interest between 5-10%
No Catalyst beyond technical breakout
Less than ideal sector (manufacturing, oil, consumer goods)
Not a hot stock or former runner
Price greater than $20.00
Pre-market volume less than 100k
Pre-market price action is well off the highs
C Quality Setup
Float greater than 100mil shares
Short Interest less than 5%
Former Pump and Dump stock
Very small gap less than 4%
Less than 50k pre-market volume
Seeking Volatility in Small Caps
In general we look for stocks that have the potential to make big moves. As day traders we profit when stocks are moving. Flat markets = no day trading. This means we have to hunt for volatility every day. Some might argue that day traders and high frequency traders increase volatility in the market with our tendency to pile into runners and quickly pull away from stocks moving down. I would counter that day traders provide a tremendous amount of liquidity to the market that allow other trades to easily enter or exit as they wish.
The question for day traders is how do we find volatility that we can trade in a predictable and repeatable way? At Warrior Trading we focus on only trading stocks with a catalyst. We hunt for stocks advancing pre-market at least 5% and then begin to search our news feed for the cause. We prefer 1st rate quality catalysts such as news from the company including earnings, updated guidance, press releases, etc. We also like regulatory announcements from the Security and Exchange Commission, the Food and Drug Administration, the Environmental Protection Agency, etc. Common second rate quality catalysts include analysts price target upgrades, speculation or rumors, articles by well respected writers, etc.
Each morning we prepare a watch list of the top 5 stocks advancing. We sort through these and grade them based on a specific set of criteria. The most important technical we look at is the float of the stock. The float is the number of outstanding shares available for trading. A low float means there is a reduced supply and during a day of extreme demand due to a catalyst these low float stocks can easily run 20% intraday. This is the type of volatility traders are hunting for.
Once the market opens the fun begins! We trade the same patterns as other retail traders. We look for bull flags, opening range breakouts, and flat top breakouts. These simple breaks of support and resistance are the most common pattern for retail traders to take. Therefor the more retail traders watching a stock the better the odds these breaks will occur with tremendous volume. When you combine low float stocks with a good catalyst we can get explosive stocks.
Just look at a few of the examples we’ve seen in recent months.