How to Scan for Trending Stocks
In this article, we’ll be reviewing a method for finding trending stocks. Trend following and momentum trading are two of the most popular and most profitable trading styles. You need to know what qualifies as a trend, sythesize that knowledge into standard market measurements, and use modern tools to find those stocks. By the end of this article you will be able to do just that.
*This article will speak and analyze criteria as if one was going long, buying stocks. Much of the criteria can be reversed for stocks in a downtrend to short, but there are some different prescriptions for that practice. We recommend doing more research to do this effectively.
Tools to Scan for Trending Stocks
We’ll be using Finviz to scan for our trending stocks. Finviz is a fantastic tool for keeping up with and analyzing the markets. They have an amazing free offering as well as some enhanced features included in a reasonably priced premium subscription. There are a number of free stock scanners available online and many broker platforms contain scanners as well. The principles behind how this trade idea is turned into criteria to be scanned for are the same. The parameters may vary slightly depending on your platform, but the few we’ll be using today should be fairly common.
Moving Average Criteria — The Bread and Butter of Trending Stocks
How Moving Averages Represent Trends
The Moving average is a commonly used technical indicator that calculates the mean for a given set of prices. This mean smooths out price data and serves to cut out a lot of the random, short-term fluctuations in price over time. The moving average is a lagging indicator since it is derived from price moves and prints that have already happened. The moving average is, by its nature, a trend following indicator.
The longer the moving average period, the longer the trend it represents. Longer trends are said to have more strength or conviction as more and more buyers see value in the stock and bid it to higher prices. Moving averages of different periods have been personified to represent different kinds of traders. A 10 day moving average does a better job of reflecting the action of short term traders while a 200 day moving average does a better job of reflecting the sentiment of longer term traders.
Moving Average Criteria for Trends
One of the criteria we’ll use will be a series of “stacked” moving averages. We’ll enter conditions that place the 50 day moving average over the 200 day moving average, stating the medium term trend is above the long term trend, and the the 20 day moving average above the 50 day moving average, stating the stock is trending higher in the short term than the medium. This is does a good job of finding a solid trend.
We will enter this criteria in Finviz by setting 200 day moving average criteria to “SMA200 below SMA 50”. This describes the stacking quality we want. We will follow a similar pattern when describing the 50 day moving average relationship to the 20 day moving average, which gives us the option of using the 20 period moving average criteria to state if we’d like the price to be above this average (a very strong moment in the trend).
But this alone is not a perfect measure of strength. All the above moving averages can be stacked when the stock is at a price level much closer to its 52 week low than high. Some trend followers do not find it a desirable quality in a stock. Something that’s trending shouldn’t be near its lows. Our scanning tool has some criteria to solve just this problem.
Distance from 52 week High / Low Criteria
Healthy trends are characterized by higher highs and lower lows. The longer this is goes on the stronger the trend is said to be. Its possible for many stocks to meet our stacked moving average criteria while still being near a low point in the years price history. Some trend followers find this characteristic undesirable and have stated one will be more successful buying closer to new highs. Applying this condition can be done with the use of the 52 Week High/Low criteria and will eliminate stocks that are not showing real strength in their trends and we can focus on the best names. We’ll set it to be zero to ten percent below the high.
Price Performance Criteria for Trending Stocks
We’ve done a decent job of finding stocks in a confirmed uptrend. We want to put our capital in only the best names for superior returns, the strongest movers, not a stock that’s been only slightly trending upwards offering a worse return than a benchmark index. We can find stocks that are currently experiencing some decent momentum by adding a performance criteria. The criteria we’re looking for in Finviz is called Performance or Performance 2. You can combine the two in order to describe a number of interesting scenarios of your choosing. For our example, we’ll look for stocks up twenty percent for the month.
Average Volume And Relative Volume Criteria
Volume related qualities can have a few uses in our scanning. Average volume, in the case of trends, can be a measure of how much interest the stock has gained. The more interest a stock has gained (volume), the more its ability to move. But this is not always true. What we’re really looking for is an increase in volume relative to its own past volume, which brings us to the Relative Volume criteria, which is a measure of exactly that. Relative volume criteria in your scans can pinpoint stocks that are getting more attention than usual relative to their average volume.
When is Relative Volume Most Useful
Relative volume is particularly valuable in breakouts where its effective at signaling the start of a new leg of a trend. Stocks that breakout of a base or through a level of resistance with higher than average volume are often said to have more conviction in the move as more consumers have bid up the price through the level of significance. The limitation of relative volume in this case is that it is looking at the previous day rather than a longer period. A strong indication of new larger attention on a stock would be if relative volume for the past few weeks was held at greater levels than the average volume for a longer period of time. We can apply the relative volume criteria to look for potential stocks making good breakouts today.
The above is one methodology for how to scan for trending stocks. Applying the criteria above will give you a solid list of stocks exhibiting strong trends and momentum to look for good entry points. There are plenty of other filter criteria one can add to this to narrow the list further and express other values in the market such as fundamental criteria like earnings per share or sales. We recommend using this as a basis for ideas and creating a larger trading plan with finer detailed mechanics for entries, exits, and other actions.
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