Building An Effective Watchlist

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Building An Effective Watchlist

As of 2019, US stock exchanges list around 4,200 items, yet the average trader or fund manager only has access to a portion of this windfall due to a failure to create effective watchlists. Identifying equities that completely support effective techniques necessitates a lot of skill sets, but the effort is rewarded since it results in a trading advantage that lasts a lifetime.

A well-organized watchlist requires knowledge of our current market environment, how various levels of capitalization influence price growth, and how different sectors respond to catalysts over time. Seasonality, mood, and economic cycles all play a role in determining which candidates to follow on a daily, weekly, or monthly basis.

Key Takeaways

  • In three steps, you can create an excellent watchlist. First, gather a small number of leadership or liquidity components from each key industry. Second, include scanned lists of equities that fit broad technical characteristics that correspond to your market strategy. Third, rescan the list every night.
  • Many broker platforms also provide surprisingly detailed scanning functions to help you set up a watchlist.
  • Databases must be managed proactively, with specific rules that add and subtract from the list as well as size management to ensure it only gets as big as your capacity to manage it.
  • Don’t skip sectors you’re not trading at the time, because you want to be up and running if rotational behavior hits the market and they suddenly become the darlings of Wall Street.

Setting up a Watchlist

Watchlists may be tailored to the amount of time a participant has available to trade and monitor the financial markets. A part-timer who fills a few roles each week may keep things easy by compiling a list of 50 to 100 concerns to monitor on a daily basis.

Committed at-home traders and market professionals of all levels must devote more time to the watchlist duty, creating a main database of 300 to 500 stocks and a secondary list that fits on their trading screens.

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In general, depending on the area taken up by charts, scanners, news tickers, and market depth windows, each trading platform may contain 25 to 75 issues. At least one screen should be dedicated solely to tickers, with each item showing just two or three fields, such as latest price, net change, and percentage change. If you’re a visual person, add a single chart to this page, connecting the tickers to enable for a rapid examination of price trends throughout the trading day.

Buildinga Watchlist Database

Stocks on your trading screens may originate from a variety of sources, but a well-maintained database will give the bulk of these concerns while allowing for continual refilling if a single security is eliminated due to technical violations, boring activity, or a change in market tone.

Begin by adding a few market leaders, or laggards if you’re concentrating on the short side, from each major sector and capitalization level down to $250 million to the database. These sector listings may be found on the Internet and in the majority of charting software products.

Avoid lightly traded stocks at this stage since they often have huge bid-ask spreads, which are not suited to an aggressive trading style. Next, make a list of your favorite stocks, which will almost certainly include widely held equities popular among traders, such as Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), and Meta, Inc. (META), previously Facebook. Add this list to the database as a permanent group to monitor throughout all forms of uptrends and downtrends.

So go through all of the groupings, including REITs, utilities, and high-yielding assets that traders prefer to shun when hunting for chances. Foreign equities that trade as ADRs (American Depository Receipts) may also be included as long as you stick to extremely liquid issues and charts that aren’t plagued with holes from nocturnal gaps.

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Scanning the Market

Now it’s time to scour the market for equities that fit particular criteria that correspond to your trading strategy. After you’ve added these problems to the database, you’ll have a functional list that can be rescanned nightly for certain patterns and settings, as well as used to weed out issues you no longer want to track.

Many charting packages can accomplish this job, but if you want to develop sophisticated code that focuses on tightly specified output, a separate application makes sense. This main application should also be capable of scanning for new problems as well as rescanning an existing list.

For paid clients, Worden’s TC2000, Wealth-Lab, and Trade-Ideas provide robust database options, but you may construct one for free using Investopedia’s portfolio watchlist experience. Others provide more restricted free and less expensive choices. Stockcharts, FinViz, Google Finance, Marketwatch, and Yahoo! Finance are examples of sites that provide limited watchlist and scanning capability.

Avoid being too detailed in the first scanning criteria since your visual evaluation after candidates have been included will be more useful in identifying particular possibilities. The goal is to find prospects you can monitor on a daily or weekly basis, looking for your favored patterns and setups to appear. After creating the database, use the nightly scan to target on more precisely specified criteria, such as equities resting at important resistance levels that might break out in the next sessions. Combine basic technical and fundamental criteria to identify companies that are likely to get widespread attention in the coming weeks.

A scan that incorporates “price versus the 50-day EMA” and “earnings growth over X quarters,” for example, combines well to find the same companies that Wall Street analysts are keeping an eye on from their desks in lower Manhattan. Spending hours building immaculate scanning code that discovers perfect diamonds and no losers is a waste of time since your eyes will do a better job filling in the missing bits if you commit to revisiting the list nightly or monthly.

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Keeping track of a watchlist is a time-consuming operation that must be done on a regular basis.

Common Ways to Scan the Market

These technical tools are key in making trading decisions.

  • Candlestick hammers and dojis that identify one-bar reversals.
  • Securities with high or low relative strength undergoing countertrend pullbacks.
  • Patterns that may indicate a shift in trend, either upward or downward.
  • Alarms that detect unexpected activity, such as three to five times the typical daily volume with little or no price change.
  • Percentage change today, in the previous five days, or in the last 30 days, sorted by daily volume larger than the average.
  • Breakout and breakdown signals are widely used.
  • In downtrends, weak rallies into resistance.

The Bottom Line

In three steps, you can create an excellent watchlist. First, gather a small number of leadership or liquidity components from each key industry. Second, include scanned lists of equities that fit broad technical characteristics that correspond to your market strategy. Third, rescan the list overnight to identify trends or setups that might lead to opportunities in the next session, while eliminating problems you no longer want to watch due to technical violations, mergers, secondary offerings, or other actions that make it less likely you’ll take exposure.

Instead of starting from scratch each week, the goal is to create a loose but useful list, adding and eliminating as you go but preserving most of the items for months at a time.

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