Day Trading Encyclopedia
Stock Market Scanners
What is a stock scanner?
A stock scanner is a screening tool that searches the markets to find stocks that meet a set of user-selected criteria and metrics for trading and investing. Scanners can be modified to find the most suitable candidates that meet your specific filters. Technology has streamlined the time consuming task of trying to find new trading opportunities to make it more convenient and efficient for the end user. The speed and convenience of stock scanners make them an essential tool for all traders and investors.
Noise Reduction and Pitfalls
When used correctly, scanners can help the user cut through the noise in the markets to channel the focus on the most qualified candidates. However, it important to realize that scan results are meant only as a filter. You will still need to carefully analyze the tradability and confirm the set-ups before considering a trade. Not all scanners are accurate or reliable, especially pattern based scanners. When used improperly, scanners can spread a trader too thin between candidates and create more opportunities to lose money quicker. A trader should be well versed in the criteria and test how well a scanner actually screens to gauge how reliable it is.
Platform-Based and Desktop Scanners
Most trading platforms have some sort of a scanning tool. These tools can be as basic as an intraday new high/low scan or as intricate as a harmonic pattern-based scans. The more complex the scan filters are, the tougher it can be to attain accurate and timely results. Platform based scanners can search the entire markets or a select group of stocks. It is important to distinguish whether the scanner is using your computer’s resources or the data provider’s servers to perform scans. The number crunching can be a major resource hog that can slow down your system performance. Depending on how specific your criteria is, you can determine if you will need to some programming training to ensure more accurate results.
Desktop Scanner Software
Downloadable desktop-based scanning software can produce quicker results but can greatly drain your computer’s resources and slow down other functions. Users should limit the scans to groups of stocks like watch lists or sectors, rather than the whole market to ensure proper functionality and offset performance slow down. With a smaller sample size, these programs can be customized to alert potential pattern triggers much quicker than a cloud-based scanner. They will require programming knowledge and fluency in the criteria selection process to customize the scans.
These are more hands-on programs that can be time consuming to set-up for the user especially if programming knowledge is required, but the accuracy of the scans are the highest. For example, let’s say you want to set-up a scan to find stocks that are forming a 20-band stochastic crossover combined with a rising 5 and 15-period simple moving average on a 15-minute time frame that is priced between $20-$30 on greater than 1.5 times relative volume with a minimum average daily volume of 1 million shares. Having the scanner monitor your 100 stocks in real-time compared to over 6,000 stocks makes a big difference. In addition to draining more resources and the timeliness of results, you will also have to contend with potentially a lot more candidates to analyze. Your customized desktop scanner may spit out 3 candidates within seconds of qualifying whereas an online scanner may spit out 50 candidates within minutes of qualifying. With your watch list scan, you should already be familiar with the stocks and their tradability, whereas many of the stocks on the universal scan may be completely foreign to you.
Inevitably, you will have to quickly analyze and confirm the set-up before deciding to take the trade. By being more selective with the scan filters and sample size, you are able to pinpoint the exact set-up with stocks you are already familiar with and therefore can step into the trade within seconds. Compare that to sifting through the 50 results to find the few candidates that you are familiar with and then having to confirm the set-up accuracy before narrowing down which ones are valid to consider trading. This may take anywhere from minutes to an hour. At that point, the pattern may have completed as you miss the window of opportunity due to the additional legwork needed to validate the results. Which approach seems more efficient for you?
Of course, the scan criteria could be ratcheted even tighter if the programs allows. However, the larger the sample size, the less complex the criteria should be in order to attain timely results but that means more legwork for the end user to validate results. The offset to this is either having a very powerful computer and or programming knowledge. This is why programmers are in such high demand.
Online Subscription-Based Scanners
Many popular subscription-based scanning services speed up the process by providing pre-selected scan criteria that crunches the numbers on their servers and simply streams the results online. While these can be customized, most users rely on the pre-set scans. If the distribution base of users is large enough, the results of the scans can generate much interest and have a self-fulfilling prophecy effect ensuring a swarming of trades on the most popular scan set-ups. However, with time, the effect can backfire once the transparency becomes too obvious as traders look to fade the results. Therefore, it is imperative that the scan results are not only validated but also confirmed to be early in the pattern. You don’t want to be alerted of a candidate long after it has completed where you may end of chasing a thinned out opportunity.
Keep in mind, with online scanners; you aren’t the only one privy to the scan results. The trade opportunities can get crowded quickly. Traders can get hurt quickly from jumping head first into anything that pops up on a scan.
The timeliness of the scan results is a top for intra-day scanners, where seconds and minutes can make the difference between ripe or lost opportunity. End-of-day scanners that generate results after the market close are useful for generating ideas to trade the next day and for swing traders.
Types of Stock Scanners
There are two basic functions and search periods for stock scanners, fundamental and technical based on end-of-day or real-time intraday data. You will have to decide what type of analysis is best suited for the type of trades you plan on making trades and ythe style of trade you plan to make. For longer-term Investment and swing trading purposes, a fundamental scanner is ideal. For trading opportunities intra-day or short-term swing trading, a technical scanner is most suitable.
These are the most abundant types of “free” scanners available online and on most broker platforms. They are tailored to long-term investors and fundamentals based traders. These scanners are very useful for finding stocks that are undervalued or overvalued. These are also great for comparing stocks against their industry, sector, peers and benchmark indexes. A simple value scan could have criteria like: Annual Earnings Growth > 20%, Annual Sales Growth >25%, P/E < 20, Price/Book <2, Priced between $5 and $50. A deep value scan where a company is trading under cash would involve a filter like Cash Per Share > Share price. The combination of search filters and criteria is limitless.
These scanners search for specific price patterns (IE: flag, triangles, breakouts, breakdowns, double support/resistance) and triggers including specific candlestick formations (IE: hammers, doji, shooting stars), indicator triggers (moving averages, stochastic, MACD, RSI) and price alerts (IE: new highs and lows, %Price change). Technical analysis scans require more customization on the program level or more effort on the evaluation process after candidates are identified for the best efficiency and optimal use.
These scanners output pattern or fundamental based results. Traders should be in no hurry to step into a trade when using an end-of-day (EOD) scanner. These scans are meant to assist in the research process to plan for the next day’s trading session. Since the results are formulated based on closing prices, there is no immediate need or opportunity to trade the stocks.
These scanners work to spot stocks during market hours. These are highly time sensitive results that require you to be able to analyze results on the fly and quickly determine if a trade should be taken. Intraday patterns can develop and fade out rapidly. Daytraders get the most benefit from these types of stock scanners.
How to Use Stock Market Scanners
The proper use of a stock scanner depends on what you are using it for. Remember that a scanner is a tool that provides potential candidates to trade. You must still apply your own triggers once the candidates are validated and you are familiar with the stock. Be careful to avoid jumping in head first to any stock that pops up in a scan. You don’t want to jump head first into the deep end of the pool without knowing how to swim.
Building a Watch List
Stock scanners that search the general markets for candidates are a great way to introduce you to new stocks, which can be added to the watch list. Keep in mind those new stocks should be monitored first to get acclimated to the pace of the price action, spread, volume and liquidity. By modifying the filters to scan for only stocks that meet your price range and minimum volume requirements, you can narrow the field dramatically.
The tightness of your filters will be the key to generating accurate results. Make sure the parameters are properly set. If you are scanning for pattern set ups, make sure to validate how accurate the results are. For example, scans for hammer candlesticks may generate results with a candle that appears to be a hammer by itself, but lacks the preceding three consecutive red candles that make it an effective reversal hammer candle. If the scan is a pre-set one, then be aware of the flaw. If the scan can be customized, then it would be prudent to learn the necessary programming in order to produce the needed results. As the example illustrates, scanners are not intuitive. They often miss the context that impacts the effectiveness of the pattern during scans.
Criteria for Good Scan Results
To attain solid scan results, you must identify what exactly you are looking for ahead of time. What you input will make or break your scans. Be aware that tweaking will be required along the way in order to generate the most accurate candidates. The accuracy of the scans will be based on your filtering criteria. Accurate results help to speed up the time it takes to manually analyze the set-up, confirm triggers and put on a trade.
Parameter and Trigger Settings
Basic criteria should include the structure parameters for the stock including price range (IE: $20-$50), minimum average trading volume (IE: 1 million shares a day), minimum float (IE: 100 million shares) and exchanges (IE: NYSE, NASDAQ and AMEX). This is to avoid scans for thin, illiquid stagnant and penny stocks. For pattern-based criteria, be sure to focus on the exact trigger that would prompt a trade (IE: 200-period moving average breakout with stochastic crossover up through 20-40 band on greater than 2X relative volume). This sets the filters to confirm a trigger first then allows you to confirm and decide quicker whether to place a trade.
Ultimately, it is all about maximizing the efficiency by streamlining the process from candidate to trade in the timeliest manner in order to have enough time to take advantage of a trading opportunity.
Quality Over Quantity
The purpose of a stock scanner is to automate the search and filter process to identify stocks that meet your criteria. You are using technology to do the tedious legwork of monitoring the market or a watch list of stocks on your behalf. Scans should be selective and discriminating in generating results. Quality is measured by the timeliness, accuracy and validity of the results in meeting your criteria.
Think of using a stock scanner like hiring a corporate headhunter to search the markets for qualified candidates. The headhunter acts as the gatekeeper that should qualify only the top recruits to pass on to you. Your job is to “interview” them for the “job”, analyze them for potential trades. The stricter the qualification process, the easier it is to hire and put on the trade.
Segment Custom Scans to Your Niche
The more customized your scans are, the more accurate your results should be. Focus on customizing to your niche trading set-ups and stocks. The key here is familiarity equates to less downtime acclimating to the stock before placing a trade. Bottom line, it results in a less slippage and allows you to hit the ground “running” soon after a candidate triggers on the scanner.
Scan for Stocks With Significant Price Movements
This may seem obvious, but to ensure efficiency it is prudent to make sure that your intra-day scanned stocks have a filter in place to output stocks with significant price moves. In order to profit from volatility, there must be volatility. Most importantly, there needs to be other participants in ensure liquidity. The best candidates will be the ones with the most eyeballs. Eyeballs are drawn to stocks generating big price moves.