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 

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.