Sunday, 4 November 2018

How I Find Day Trades

Disclaimer:

This site is operated by Edward Vranic.


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People have asked me numerous times how do I find day trades. This article will describe that process as concisely as possible. I might update with more information with time.

I have created a Twitter account @evdaytrader which I will be using to put out my day trading picks and watches.

In addition to reading the extensive disclaimer above, I cannot stress this enough. Day trading is often a losing proposition. You will lose money at some point in time if you choose to follow my trades or do your own thing. I will announce when I buy but not always my sells because buying is easy but selling is hard and I often do it in many little pieces as I will demonstrate below.

I can tell you in no uncertain terms that my win-loss record on day trades is clearly more than 50% losses. But when I win, I win large. The strategy I'm about to describe helped me find RNX at $0.16 on the first trading day after it announced its bonanza gold find. It helped me find YECO a couple of weeks ago for an easy triple by lunch time and OPHC several months ago for another triple before the end of the day. It is also the same strategy that got me chasing numerous duds that I had to sell at a loss. So it is far from perfect and people must be aware of that. The strategy here will be a low-percentage, high-return game. I do not put a lot of money into these trades unless I determine that a certain position is worth a long term hold after doing more research on the company in question.

I am by no means an expert on day trading. I don't make a living from this. But I think I have enough market expertise to have something worthwhile to share on the subject.

Why am I doing this? Three reasons:

1. People keep on asking me through private messages on Facebook for tips, particularly after I celebrate a winning day trade. This article and my new Twitter handle will hopefully calm most of that.

2. I think this will help me become a better trader, by instilling some discipline. If I am not confident enough to tell people about a certain day trade or multi-day news-based speculative play, I probably shouldn't be buying it.

3. It could increase my publicity, which is always a good thing. On that note...

Be wary of the chat room effect and popular day trading services

I am not in penny stock chat rooms and have no interest in them. I'll tell you a little secret about how they work and can claim to be a success. If a chat room owner buys in a thinly traded penny stock and then tells the 50 or 100 dedicated members of that chat room the play, what do you think is going to happen? Those 50 to 100 people are going to dramatically impact the demand-supply imbalance of the stock and it will shoot up. Then the owners of the room can make up some bullshit about having interpreted the charts and gain even more followers, creating a snowball effect. This is essentially no more than a Ponzi scheme, where the traders on top, the stock picker and the early movers, get a chance to sell at a profit to the traders at the bottom of the pyramid.

It's up to you if you want to play the game of following other people, including myself, into their plays. It is your money. Just be aware of the risks. 

Finding day trade candidates in Canada

First, I will talk about how I find my day trade candidates in Canada. The market is much smaller than the U.S., which makes the process quite simple. As soon as the market opens, I head to the market movers section on TMX Money. I look for the top volume stocks on the TSX and TSX Venture. Any stocks with a significant percentage change, particularly increases, I look for any news.


The CSE also has a daily movers page at https://thecse.com/en/trading/market-activity. This one is still 15 minutes delayed as of the date of this writing and I tend to forget about it anyways since most of the CSE is cannabis stocks that react to industry-wide movements.

I use to scour the newswires for interesting news releases pre-market and consulted IIROC's halts and resumption page at http://www.iiroc.ca/news/Pages/Halts-Resumptions.aspx for stocks that may have been halted for news. I have really reduced that activity for two reasons:

1. TMX Money has recently changed its system where the market movers data was once 15 minutes delayed to real-time quotes. That means this data is now available right at 9:30-9:31 when it use to be available at 9:45-9:46.

2. I don't really find it to be an advantage to be the absolute first mover on news. Stocks often gap up at open then pull back on good news, more often than not in my experience, making it likely that a purchase at 9:35 or 9:45 or 10:00 will be at a lower price than it was at 9:30. The ones that REALLY move on REALLY GOOD news, even if you have to chase at a higher price than at 9:30, chances are you are going to be in a winner anyways.

The combination of these two factors means that scouring news releases in Canada for a gem is a lot of work for very little or even negative benefit. It's better for me to focus all of my pre-market efforts on the U.S. market.

There are four basic forms in which upwards movement can take place:

1. The stock is moving on good news.
2. The stock is moving on fluff news.
3. The stock is moving (or continuing a move) on several day old news.
4. The stock is moving for no publicly disseminated reason.

The easiest way to rank these four in terms of quality down to trap would be #1, #3, #4 and #2. Fluff news is actually worse than no news because fluff news probably means a desperate call for liquidity to sell into, either by an investor or in the form of dilution. I have a look at financial filings on SEDAR to get an idea of what the balance sheet of a certain company looks like. Sometimes I do it before I get in a trade, sometimes I do it after a small initial purchase than decide if I want to load up more or sell the stock based on what I see.

Another consideration is a stock's float. A very small float stock will move a lot faster than a large one, and also justifies a larger move on good news because the market cap is smaller. A $0.10 stock with 10 million shares outstanding should move considerably more than a $0.10 stock with 100 million shares outstanding on the news of signing a $1 million contract based on fundamentals.

A quick warning about chasing stocks on no news.  IIROC often halts these types of stocks and forces them to put out a "no material news" release out, which can kill the momentum in a stock that is moving up. This is a risk you will have to take if you want to trade stocks like that.

Another important factor is financing. If you are chasing a Venture stock, the vast majority of the time that company will either have recently completed a financing or be in need of a financing. It will be a part of the game. That's why I hate chasing stocks up on good news after a multi-day run. They are almost always a hot potato waiting to dilute. I need to make clear that dilution is not always bad news if you are looking to invest. If you are looking to trade, it almost always is because it involves a short term pullback and possible loss of momentum. The worst types of stocks to chase are the ones where a locked up private placement is about to free trade (generally one that closed nearly four months ago). To find these, just look at the news feed history of the stock. The best ones are the ones which sit in the sweet spot between financing - the last one occurred a long time ago, but the company still has a lot of cash for the time being. Especially stocks where the financing was on very favourable terms (maybe even through debt) or at a price above the current market price.

Now once in a while you will get a gem opportunity where the stock has had very good news, no recent financing and no need to finance in the future. This kind of stock might be one I'd keep for a while and choose to turn it into an investment. A great recent example of that was RNX. Most day trades won't turn into longer term trades/investments like RNX did. I'll share my sell strategy in the last section.

This is the process that I follow for potential trades soon after opening bell. But I consult the top volume/top movers lists on the Canadian exchanges several times in a day as well as IIROC's halts/resumption list for any potential late day movers or news.

As much as it shames me to say this, I actually consult Stockhouse for assistance in determining a day trade. As most penny stocks are money-losing propositions in the long-term, there will be no shortage of bagholders who complain about each stock on each bullboard. If the stock I have identified is a new name to me, reading up on old posts can actually be a good source of contrary information. Obviously you have to take anything posted with a grain of salt, especially "management sucks, blah blah blah" kind of whining.

Stockhouse can also be a help in determining pumps and dumps created by spammers or otherwise nefarious accounts. One person or a small group can put $10,000 to $20,000 into a 2 cent stock and move it up to 3 cents on 500,000 or more volume at opening bell and all of a sudden it is hitting the top volume board. Then they flood the stock's bullboard with their accounts about how great the stock is. Use your judgement when trying to determine if recent posts on a bullboard are done by legitimate investors talking about the early stages of a big runner or flippers looking to sell you stock for a penny gain. My favourite type of posts to take seriously are the ones that alert me to a mid-day news release, because my guard is down after doing the heavy research proceeding and immediately following opening bell.

Finding day trade candidates in the United States

It is relatively easy to find the full universe of trade targets on the TSX on a given day. For the most part, TSX Venture companies are on an even keel when it comes to a certain level of crap. Most of them have had or will need financing. Most are losing money. Most have mediocre balance sheets. Most do have some kind of legitimate business with legitimate future prospects.

When it comes to trading small caps in the U.S. - and I am talking about the NASDAQ, I barely even touch OTC - there is a WIDE range of quality. There are the toxic-financed companies like HMNY or NVCN which are GUARANTEED to lose you money if you hold onto them for more than a few days that scrape the absolute bottom of the barrel. Then there are stocks with seemingly good operations and good balance sheets that trade well below book value, sometimes even below CASH value. But those stocks are usually foreign and management teams don't give a damn about North American shareholders so they are forever value traps. Simply following top movers or unusual volume in the U.S. can get you trapped into a loser easily if you're not careful.

The one thing you definitely want to avoid are stocks with toxic financing. This usually comes in the form of "institutional investors" (I use that term loosely because these houses behave more like vultures and loan sharks) owning convertible debt or preferred shares with undefined conversion prices. Before or shortly after you get into a trade (so you know what you're getting into), consult the SEC website for recent filings. The search page is at the following link https://www.sec.gov/edgar/searchedgar/companysearch.html

What you are most interested in looking for are "424B3" filings. You see in this example below, one was filed October 24, the most recent filing for this stock I was looking at as a potential day trade. I ended up avoiding it thanks to the content I read in the prospectus, and it's a good thing I did because it dropped by 50% within two days of looking at it.


A quick way to find toxic financing without reading pages and pages of a prospectus is to do a find on terms like "VWAP"/"volume weighted average price" or "cashless". It'll clue you in to conversion price terms like "80% of the VWAP over the last 20 trading days", meaning a vulture financier can short sell a stock with impunity and cover with shares with a conversion price below market. In fact it is in their best interest to short it as low as possible because the VWAP will be lower and so will be their conversion price. They are just looking for volume to short into so they can move a lot of stock and cash in their arbitrage set up as quickly as possible. Cashless meaning the cashless exercise of warrants where the financiers can convert warrants without fronting the cash and dump the stock onto the market. These are NOT investors. These are firms merely looking to cash in on arbitrage and don't care about the stock, the stock price, or the business of the company. It cracks me up seeing retail traders get excited because a "big" name institution bought into one of these toxic financing deals.

Avoid chasing these types of stocks after a pre-market spike. They almost always end the day lower than their high as the spike is nothing more than the market makers attempt to lure in lots of retail traders to create buy volume to dump into through the prior two mentioned means. It doesn't ALWAYS work like this. I have stricken toxic-financed stocks from my potential day trading list only to see them up another 100% later in the day. But understand that if you are going to play this game, the odds are greatly stacked against you. Just look at 5 or 3 or 1 year charts of HMNY, NVCN, DRYS, GBSN, RGSE, TOPS and a whole slew of other stocks that have had to take on toxic financing in their past.


TOPS - a $7 BILLION per share stock price, split adjusted, back in 2004; $2 stock price now

There are two stock screeners I use for determining potential day trades in the United States. GlobeInvestor at http://www.globeinvestor.com/v5/content/filters lets me sort by top gainers and losers on the NASDAQ and NYSE, 15 minute delayed quotes, starting at 9:45. I consult certain Stocktwits accounts and Seeking Alpha's news feed to see top pre-market movers in preparation of a 9:30 buy in. Looking for stocks that are up in the pre-market at 8:30 or 9:00 allows me the time to read up on the news (if any) that is driving the movement as well as see if there are any recent bad financing deals that will hamper the stock.

But by far my favourite stock screener is Finviz. This is the one that helped me find OPHC months ago. At the time of trading YECO, I also knew that it was a very low float stock from a previous trade that I did on it (didn't work out), also found on Finviz.

Why do I like Finviz so much? It has just about every data point you could want on a stock and it allows you to sort by them all. My favourite is the search by ownership tab which allows me to sort by shares outstanding and float:

https://finviz.com/screener.ashx?v=131&ft=3&o=sharesoutstanding


This tab not only lets me search by shares outstanding (and the stocks with ~1 million shares outstanding can really move like YECO and OPHC), but at the same time I can see their float, percentage that insiders and institutions own, and short ratio to determine the potential for short squeezes. When consulting this list overnight, I can see the previous day's price, volume and % change, and filter out any interesting potential big runners for the next day. I can also watch this list throughout the trading day for any stocks that are picking up on price and volume before they really explode.

The one caveat to this list is that Finviz is not always up to date with shares outstanding data. So you'll have to pay attention to any recent financing manually from the SEC site. This happens a lot with stocks that recently undergo a reverse split. They'll appear near the top of the list after a reverse split, then the financing increases their share count and they drop back down the list. HMNY is a good example of that.

For the stocks that don't make the first few pages of this Finviz list, the stocks with greater than 5 million shares, I am at the mercy of the top movers list (GlobeInvestor during market hours, Stocktwits and Seeking Alpha feeds during the pre-market) for them to fall on my radar. They are often much more of a crapshoot. But being informed by taking a look at SEC filings can help a trader to push the odds into their favour.

My sell strategy

Buying is easy, selling is hard. Remember what I said about this being a low percentage game? Well very rarely does a day trade pick of mine immediately crater. That means at some point in time I was in the green on it. The most frustrating part of trading is selling a stock for a loss that I was up on earlier in the day. But it happens. And I do not use stop losses, and never will.

My goal is to make it big, but I never know how big that can get. 50% move? 100% move? 500% move? When a low-float stock starts running, you just never know. So the best way I have found in handling the situation is doing something like this:



As you see I bought YECO on October 17 for $1.95. Once that started to take off I put in numerous sell orders of very small amounts between $3 and $6. What is not shown here is that I continued that all the way to $8-$9. YECO ended up hitting $17 the next day before cratering and stabilizing around the $5-$7 mark now. It's better to sell too early than too late. But it is also better to sell only little bit too, too, too, too early like I did at $3. YECO could have easily reached $4 then crashed from there back to $2. Had I put in no sell orders I would have felt like a complete idiot. Using this strategy allows me to take some profits while not taking too much off the table too early.

There are often times when day trades turn into an investment. PKK originated as a day trade for me way back in March 2014 and I have held the stock since. How do I determine when I hold the stock? Like I said on a stock like RNX, if I determine there is no need to finance, I can ride it until it hits my internal target price. That target price is often a moving one based on news. A company can also turn into an investment if I like their business plan or after speaking with management I trust them, like I have with PKK.

So this is my day trading strategy in a nutshell. Follow my day trading Twitter account @evdaytrader for my picks each day.