What stocks should you be trading?

Obviously, this question is subjective and depending on who you talk to you’ll get different answers. Having said that, I’m going to tell you all, what I like to trade and WHY.

As an options trader, whenever I’m looking at stocks to trade I ask myself a few questions.

1. Does this stock typically move at least $1 in a day? – Stocks that move this much inside a day provide more opportunity to profit for traders especially options traders! Stocks that move multiple dollars in a day allow you to purchase less delta and still make good money on your contracts.
2. Does this stock have liquid options? I like stocks that have weekly options with good volume, at least 100 contracts traded on ATM options each day. This way you don’t purchase an option no one will want to buy back from you. This also minimizes the spread between the bid and ask.
3. Does this stock have a strong trend? Some traders look for pure volatility in their stocks but why trade a stock that is volatile and has no real trend vs a stock that is volatile and typically trends in one direction? It's just easier... Why should trading be any more difficult than it has to be? Learning to identify the trend is exactly what I teach my students to do.  

There are a couple of criteria I look at when building my watchlist, but I always include the ETFs SPY and QQQ.

SPY is “the market” as it is the S&P500 ETF and represents the best stocks in the market. QQQ is the Nasdaq which is full of the best-performing stocks in the market and is very tech-heavy. When QQQ is moving better than SPY you might want to look at trading tech stocks. When SPY is moving better than QQQ money is probably going into other sectors.

This brings me to the next criteria I look at, diversification across sectors. I trade multiple stocks in multiple sectors. Consumer Discretionary, Industrials/Defense, Tech, Healthcare, Semiconductors, Energy, Financials, etc. The reason I look at stocks across these sectors is the reason previously mentioned, money isn’t always flowing into tech stocks, sometimes healthcare leads so you want to make sure your Watchlist always has a stock that is getting some attention.

Now you’re probably thinking “That’s a lot to watch!” and the reality is if you do it right it’s really NOT. My watchlist which occasionally changes but mostly stays the same from year to year consists of 4-6 stocks across these different sectors as well as SPY and QQQ. These are the stocks I trade. I develop an understanding of the price action in these stocks and as things happen I get a clear idea of what to buy and where price is going using the tools and skills we develop in class.

I don’t necessarily trade each one everyday. As I said, some day’s aren’t tech stock days but instead are healthcare. Focus your attention on the sectors where the money is going. Trading is about patience and waiting for opportunity to knock. If you are always looking around for opportunity you will end up missing it in the place you were originally looking. Spend time identifying setups with entries and exits on your watchlist. Wait for those setups to jump out at you and when you get the signal, take action!

In recap:

An ideal watchlist consists of…

SPY

QQQ

+ 4-6 stocks across different sectors

Volume on weekly options in the 100s or better, Stocks that typically move at least $1 in a day, stocks in strong trends whether that trend is UP or DOWN

Develop an understanding of price action on these stocks, identify setups, set alerts and let the trades come to you! Trading is only hard if you make it so.