Scanning for Growth Stocks

Hi and happy 4th! I wanted to make a quick post on how I scan for growth stocks. These are usually much more speculative and volatile plays than the large caps I tend to focus on.

Important - I’m posting an insightful link at the bottom if your interested in how Wall street approaches swing trading.

Scan Criteria

• Volume for the day larger than ten million

• That volume must be at least three times larger than the previous day’s ten-day average volume (indicating some degree of neglect)

• Dollar volume must be at least three times larger than the previous day’s ten-day average dollar volume (redundant but keeping for now)

• Range must be at least 1.5 times higher than the previous day’s ten-day average daily range

• Gap up larger than 5% OR a prior three-day move larger than 12% (indicating early insider accumulation prior to catalyst)

• Small or non-existing lower wick (indicating low selling pressure at open)

• Post EP, at the date of my scan, the average volume must be at least 300,000

  
  What I’m Looking for in a Nutshell

  
  Plain and simple, when looking for stocks with the most potential for the biggest moves, you want to focus on the following:

  1. High Relative Strength - The higher the better, but most top traders focus on a minimum of top 20%.

  2. Strong Momentum - You not only want strong RS (relative strength), but a strong momentum move that precedes the base or flag you’re trading. You want a strong first leg up of at least 10-50%, followed by a base or consolidation. We will get more into strategies in the next chapter.

  3. High Volatility - Low volatility stocks are more stable, but they also don’t move very fast. Focus on stocks with at least a recent average volatility of 3%, preferably 4-5%+.

  4. Strong Growth - This one is more subjective, but if you use fundamentals, at a minimum find stocks with strong current growth - say, 25% YoY growth in the last few quarters. Or use future growth projections of at least 25% in the next two FYs. The higher the better. This is the minimum - look for triple-digit or high double-digit growth numbers, showing strong growth trends. Preferably, you want sales to be just as strong, indicating strong top-line growth. You can inflate earnings with accounting tricks, but you can’t really inflate sales easily.

  5. Low Float and/or Capitalization - Most studies indicate that less than 25 million float and small/mid-cap stocks are the fertile grounds where big moves are found. Some float studies indicate that less than 100 million is the best. Whatever metric you use, avoid stocks with hundreds of millions in float or more if focusing on fast growth - they are almost impossible to move in a meaningful way, short of some significant change to their business model. Think Apple or, in 2023, Nvidia (which ignored this rule).

Quick Thoughts on Entries

First, I look at overall market breadth to see if I’m in a healthy market to even make an entry.

Then, here is some criteria I use to be a bit more systematic about my trading:

1. Looking for a tight pullback and consolidation with higher lows and tightening range in the consolidation phase.

2. A range expansion (breakout) out of that consolidation. The consolidation phase is usually 2 weeks to 2 months. During the consolidation, the stock price “surfs” the rising 10- and 20-day, and sometimes the 50-day moving average.
   

   

   surfing the 10 and the 20

3. I enter on the opening range highs. The opening range highs can be the highs of the first 1-minute candle, the 5-minute candle, or the first 30-minute candle. You can use whatever time frame or a combination of them. You don’t even have to use any intraday chart, just look at the daily chart and enter when the stock is starting to break out. This method can also be traded by anticipating the breakout, but I don’t find it as effective, and more skill and experience is needed.

Swing Trading Momentum/Growth

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Happy 4th of July everyone, I hope you get to spend some quality time with your family.

-JB