Routines to maintain a healthy trading portfolio – Part 2

In our previous post on the issue of trading routines , we have outlined a daily routine to follow in order to keep your investment portfolio healthy and balanced, the routine outlined four steps to follow :

  1. Screening – define the subgroup of candidates that may enter the portfolio.
  2. Selection – select the ones that comply with a specific trading strategy logic.
  3. Order – issue the appropriate trading order to the broker.
  4. Maintain open orders – close open orders that have expired.

In this article, we would like to focus on step one and see where can we get our universe of candidates from?

When selecting stocks to trade, there are literally thousands of equities to choose from, when we focus on equities they come in all sizes, risks, and opportunities.
A trader must reduce the size of the entire equity universe to a manageable universe size in order to manually select ( step 2) the candidates to enter our portfolio.

 

Screening for gemstones

So how do you reduce the initial size of the entire equities portfolio to a manageable size?

One solution might be to use screeners, A stock screener is a tool that will screen the entire universe of stocks according to specified conditions thus reducing the number of initial assets to choose from, there are many screeners on the internet and, like most things over the internet, there are some that are free and produce remarkable results, such a high-quality screener may be used with a number of conditions to filter the initial universe of thousands of stocks into a smaller group with a few dozens of assets for us to proceed manual selection (more in future articles).

One such screener that we will review in this post is FinViz (Finviz.com), this is a mature screener that has been around for quite some time and has some features that other screeners do not have making it our #1 choice when it comes to screeners
There are other, excellent screeners out there like yahoo, etc.., but in this article, we will focus on finviz screener.

The main page of the screener contains dozens of conditions to select from, we will focus our attention on some of them so we may produce a results that will enable us to find the real gemstones.

 

Applying the right conditions

First, it’s important to select the country of all requested assets – in our case it’s in the “Country” condition, selecting USA for assets trading the US reduces the initial number from 7800 to 6800, moving on we would like to trade only liquid assets, this leads us to an average volume condition , in this case, we select only the equities that have above 1M shares in average volume, this takes the number further down to 1125, the last step is to select the size of the company, if we are searching for companies that are not too small but not too big we will go for the mid-cap companies with market capitalization of 2-10 bln$ value, and one more condition which will be the forward PE which we will select to be under 10.
The forward PE is the estimated future Price/Earning multiple for a company and in essence produces an absolute number that depicts how expensive will it be to buy the future earnings of the company, the S&P500 average stands at around 18, so 10 is a good cheap price for future earnings.

The result is a list of 51 (down from 7800..) equities and ETFs that can be represented as a list of charts so you may see its price behavior and compare apples to apples.

Now is the time to apply step 2 of the routine and manually select the assets that comply with a specific strategy and follow the rest of the routine as outlined in part 1 of this post series.

The trading routine outlined above will keep you on the right course as you maneuver the market ocean, use it to customize to your own needs, I would love to hear from you in case you are using it differently or any other comment you have on the trading routine suggested above.

Trade safely,
Alon

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