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Top Work at Home
Pick for
2007
Perfect Wealth
Formula
My Best Stock Selection
Criteria
By Bill Soriano
At Phatdads.Com we
use the following stock selection criteria to determine if a
stock should be purchased. We prefer to buy stocks that are in
the formation of a recognizable chart pattern, such as a cup
with handle, double bottom, flag, or flat base, but we like to
buy them prior to the stock breaking out of the pattern, This
gives us a much better entry point and a better chance of
being successful in the trade. We use several chart services
and screening tools to come up with a list of about 150 stocks
using the following fundamental and technical
criteria.
Earnings in the last 2
reported quarters has to be up at least 25% when compared to
the same quarter the year before.
Stock Price must be $7 or
greater, we will not buy stocks priced below $7 a
share
Stock must have a Relative
Strength of 65 or better, this is similar to IBD’s Relative
Strength ranking, the stock must have outperformed at least
65% of all other stocks over the past 6 months.
Institutional Sponsorship
between 20% and 90%. This will ensure that at least a few
institutions own shares in the stock, which is needed for
growth to occur, but the stock is not over-owned by
institutions that could lead to a big price drop on bad
news
Annual Sales of 1 billion or
less. This keeps us invested in small to mid-cap companies,
which have a higher growth potential and out of the large cap
companies that don’t.
The final screening criteria used is a Volatility
Breakout. At Phatdads.Com we define this as big price jump on
heavy volume, and we will use the 10day Average True Range,
which will be referred to as the 10ATR to determine this. Click here for more
information on Average True
Range |
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The stock must make a move up of at
least 1.5 times the 10ATR, on volume that is at least 140% above the
average volume over the past 50 days.
Note: A Volatility
Breakout occurs in a Major Index, such as the Nasdaq, or S
& P 500, when the index moves up by an amount equal to or
greater than the 10ATR on volume that is greater than the
previous day's volume and above the 50 day average. A Volatility
Breakdown would occur if the index drops by an amount equal to or
greater than the 10ATR on volume that is greater than the previous
day's volume and above the 50 day average.
For example:
If a stock has a current 10ATR of
$1.00 And the 50day average daily trading volume is 100,000 shares,
then The stock must go up at least $1.50, and trade at least 140,000
shares for a volatility breakout to occur.
Stocks that meet all of the above
criteria are then checked to determine if they have a high ranking
in their Industry Group and to also determine if the Industry Group
has out performed at least 65% of all other Industry Groups over the
past 6 months.
We then use a combination of
several technical indicators to determine if the timing is right to
buy the stock. If the stock meets all of the above criteria but the
timimg is off it will be placed in a watch list and checked daily.
Once a stock is purchased we will
set a stop loss at 2.5 times the 10ATR. For example:
If at the time of purchase the
10ATR of the stock is $1.00, we will set a stop loss at $2.50 below
the purchase price. We will raise this stop to a new level each time
the stock closes at a new high, using the current 10ATR for the
calculation. If on any day the stock drops by an amount equal to or
greater that 2 times the current 10ATR, then we will exit the
position the following morning.
As mentioned earlier we subscribe
to several chart services to do the research necessary to come up
with these selections, In addition to about 10-15 hours of research
per week.
Happy Trading!
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