How To Trade Where The Action Is...Every Day

As a trader, you want to maximize your profit potential on every trade. One way to do this is to only trade stocks that are capable of making substantial moves. Even if you are successful in predicting the direction of a move, unless you get meaningful movement, you won't be getting the most out of your trade. As a trader, your profits are limited to the amount a stock can move, so finding the most volatile stocks is imperative.

Daytraders: You want to find the stocks with the greatest intraday range -- you don't necessarily care about the direction.

Swing Traders: You want stocks capable of making a large, trending move over a period of a few days.

Options Traders: You're looking for a fast, explosive move before time value gets the best of your position.

Intermediate Term Traders: These stocks offer you great potential if any of them meet your unique fundamental and technical criteria.

Q: How can you make sure you're in stocks that have the likelihood of making substantial moves?  

A:  Trade Where The Action Is.

Each day, we generate this powerful list which shows the most volatile stocks over the past 50 trading days. Volatility can be one of your most important trading tools. Using volatility to determine how much price will move allows you to determine if a stock should be traded or not. A little unclear on volatility? No problem.

Quick Volatility Refresher

You don't have to know how volatility is calculated in order to benefit from this list, but it helps to understand how it works.

Simply put, volatility measures the change in price of a market over a given time period. In non-technical terms, think of it this way: If the Nasdaq rises 5 points one day and falls 5 points the next, volatility is low. If, however, it rallies 100 points one day and plunges 100 points the next, then volatility is high. More specifically, historical volatility (HV) is the standard deviation of the day-to-day price changes, expressed as a percentage. A $100 stock with a 10% historical volatility has a 66% chance of trading between $90 ($100 - $10) and $110 ($100 + $10) over the next year. 

Here's a quick calculation from Dave Landry's volatility lesson:

1. Divide today's close by yesterday's close
2. Take the natural log of #1
3. Take the standard deviation of #2 for length desired (the number of trading days, e.g. 50)
4. Multiply #3 by 100
5. Multiply #4 by the square root of trading days in 1 year (around 256)

More Potential, But More Risk Too

Day, option, and swing traders especially will want to seek out more volatile stocks. Because of the large intraday ranges these stocks trade in, they can provide good profit potential -- and more risk. By definition, stocks with higher HV are riskier than those with a low HV. Intermediate-term traders, be advised that because of the larger ranges, there is increased potential to be stopped out. Adjust your stops accordingly. One idea is to base your stops around the historical volatility. 

Again, from Dave's lesson, here's a calculation of the stop points:

1. Divide 260 trading days by the number of days you intend to hold the position
2. Take the square root of #1
3. Divide the historical volatility by #2
4. Take the stock price and add (for shorts) and subtract (for longs) #3 from it

The Proof Is In The Charts

Below are three stocks that came up on "Trading Where The Action Is" --  notice the kinds of moves these volatile stocks can make.

Marvell Technology (MRVL | Quote | Chart | News | PowerRating) explodes in a seven-day run after making the "Trading Where the Action Is" list on 10/31/01.

Brocade (BRCD | Quote | Chart | News | PowerRating) follows suit, with an equivalent gain.

Not to be outdone, RF Micro Devices (RFMD | Quote | Chart | News | PowerRating) takes off for a 36% gain in a few days.

While these stocks were taking off, so was the Nasdaq -- but as expected, the NDX didn't perform as well as the more volatile stocks -- up only 13%. The S&P (not pictured) performance for the same period was even less. No doubt one could have made money in the run-up shown above, but wouldn't it have been better to have been in the exploding stocks?

To find "Trading Where The Action Is" from the TM Home Page, click on Stocks, then Indicators, scroll to the bottom, and under "Actionable Signals And Other Indicators," click on "Trading Where The Action Is." 

When you get there, you'll see the list of stocks in order of volatility, with a chart option, sector, volume, earnings, and relative strength data to to help you further refine your research.

TradingMarkets.com Trading Where The Action Is

Created nightly, this list contains the most volatile stocks over the past 50 trading days. These stocks are only for the most aggressive traders who are willing to assume a high degree of risk in order to capture larger gains. Reminder: We are in no way recommending the purchase or short sale of these stocks. Trading should be based on your own understanding of market conditions, price patterns and risk; our information is designed to contribute to your understanding. Controlling risk through the use of protective stops is critical. As of the close of 11/13/01 Rank Symbol Chart Exchange Stock Name Sub Sector Price CHG Vol (00) 50 DAV (00) % of AV EPR RS12 RS6 RS3 ADX DMI 50 DMA 1 WB NYSE Wachovia Corporation Money Center Banks $ 30.00  $ 0.02  20455 32811 % 62 89 6 4 2 26 D < 2 MRVL NASDAQ Marvell Technology Group, Ltd. Semiconductor - Integrated Circuits $ 30.97  $ 0.49  21131 18220 % 116 1 24 98 95 31 U > 3 BRCD NASDAQ Brocade Communications Systems Inc Communication Equipment $ 30.64  $ 0.70  149720 183067 % 82 38 3 97 93 24 U > 4 POOL NASDAQ SCP Pool Corporation Wholesale, Other $ 23.65  $ 0.40  826 1980 % 42 73 67 58 29 16 U > 5 FFIV NASDAQ F5 Networks Inc Internet Software & Services $ 22.01  $ 1.59  15977 6971 % 229 1 92 99 99 29 U > 6 PRSE NASDAQ Precise Software Solutions Application Software $ 22.37  $ 0.66  6548 6096 % 107 90 42 96 95 34 U > 7 PMCS NASDAQ PMC-Sierra Incorporated Semiconductor - Integrated Circuits $ 22.08  $ 1.51  338470 118207 % 286 0 1 97 93 25 U > 8 MANH NASDAQ Manhattan Associates, Inc. Technical & System Software $ 34.54  $ 2.89  6950 5358 % 130 49 68 97 97 37 U > 9 QSFT NASDAQ Quest Software Inc Business Software & Services $ 23.80  $ 4.19  41189 16125 % 255 0 17 96 96 17 U > 10 BREL NASDAQ BioReliance Corporation Biotechnology $ 23.53  $ -1.22  3278 2105 % 156 98 98 98 98 30 U > 11 EMLX NASDAQ Emulex Corporation Computer Peripherals $ 28.50  $ 0.06  115840 76850 % 151 4 13 99 99 44 U > 12 JNPR NASDAQ Juniper Networks, Inc. Networking & Communication Devices $ 23.88  $ -0.11  333250 247915 % 134 13 1 97 96 38 U > 13 RFMD NASDAQ RF Micro Devices Inc Semiconductor - Integrated Circuits $ 27.30  $ 1.10  142450 117207 % 122 6 80 90 92 16 U > 14 AHAA NASDAQ Alpha Industries, Inc. Semiconductor - Integrated Circuits $ 27.39  $ -0.56  36743 28063 % 131 13 22 85 84 15 U > 15 GNSS NASDAQ Genesis Microchip Inc. Semiconductor - Integrated Circuits $ 47.80  $ 0.94  16604 22338 % 74 93 98 98 94 29 U >

How To Use The List

Pull up a chart for each stock and identify the current trend. Evaluate the stock's strength through the use of its 3-, 6-, and 12-month Relative Strength rankings. Short-term traders will probably care more about near-term RS. If you are directional trader, use the Stock Scanner to determine the strength of the trend. Look for key pattern setups such as pullbacks and trading-range breakouts as well as large surges in volume. When you see the stock set up, you'll have the confidence that it has the "juice" to make a good move. Use entry points as defined by the setup rules.

Volatility is one of a trader's best friends -- use it to your advantage. Filter out low-volatility stocks by clicking Trading Where the Action Is every day, and focus only on the big movers that will give you the big trades.

For a more detailed study of volatility, see Larry Connor's lessons on the subject, his books Street Smarts and Connors on Advanced Trading Strategies, and Dave Landry's three lessons: 1   2   3.

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