Key insights
- The author outlines a risk-based approach to stock picking for short-term trading, combining price limits and ATR-based stop-loss placement. They use TradingView's screener with filters like price, ATR, relative volume, and VWAP to identify liquid and volatile stocks within their risk parameters. This strategy aims to control potential losses by limiting price exposure and using ATR to set stop-loss levels. The impact on the broader US market is limited, but it provides a framework for individual traders.
The end goal is picking the right stocks to trade after having to systematize your risk management per se.
i) One of the more obvious ways to choose stocks based on your risk profile is to screen for your comfortable price ranges:
If we take a constant loss in absolute terms and not percent changes, say 6 units, a 300-priced stock will have much more breathing room than a 1000-priced stock; it's as simple as that.
ii) Another more interesting one is ATR-based. Have seen this in several pages, but this one described it quite well. Essentially:
Place stops at a multiple of ATR beyond entry.
Long stop = Entry − (N × ATR) Short stop = Entry + (N × ATR)
Typical N: 1.5× to 2× for day trading, 2× to 3× for swing.
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Combining the above two sorts of filters, we can head to TradingView's screener and screen stocks. For example, say you have 300 for day trading and are willing to risk 2% per trade, which is 6/trade:
(i) Assuming without leverage, price <= 300.
(ii) Taking N=2, N x ATR = max loss = 6; ATR = 6/2 = 3. Thus ATR <= 3.
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Note that you may have to combine it with other filters. I usually go with Rel Vol > 3 & VWAP > price or VWAP < price, depending on the market. That gives me good liquidity and volatility.
This is how I more or less do pick stocks for short-term trades. Any comments or roasts are welcome :_)
I've been exploring this concept of stock picking in depth. I'm curious how you go about this from risk management or other perspectives.