The process of stock screening can be broken down into clear and efficient steps that lead you to new trading and investing opportunities quickly. Here’s how it works:
First, you need to capture all the relevant data in the stock screening software. If you’re a fundamental guy obviously you’re going to need the last 5 years of annual financial statements, plus the most recent quarterlies. If you’re a price-oriented trader, you are probably interested in price patterns, candlesticks, or technical indicator studies on a shorter term data population. So you need to pick the data set on which the filter rule will be applied.
Second, you need to devise the filtering rules you want to use in your stock screening tool. If you’re a fundamental investor, your rule might look something like this: Tell me all stocks on the Toronto Exchange which have market cap less than 100 million, debt-to-equity ratio less than 2, and average quarterly cash flow growth rate over the last 3 quarters of at least 10%. This screen will select small cap stocks with low leverage and increasing cash flows — a good indicator of financial health. If you’re a technical trader, your rule might be: Tell me all stocks on the Toronto Exchange with closing price less than 50 and greater than 5, which have RSI greater than 50, a rising 50 period moving average, and a 3 day pullback in price. This screen will select all stocks that are in an uptrend, with relatively strong internal strength, but which have had a short term pullback that might be a buying opportunity.
Third, you need to be able to drill down and further analyze the stocks that the stock screening application discovered among the entire universe of stocks. As a fundamental investor, you want immediate access to the other financial data for each stock selected by the screen. As a technical trader you want to see the price and volume on a time series chart, with perhaps several additional indicator overlays.
Once you’ve done your further drill down and analysis, you can select stocks to trade or invest in. This process should be constantly done to ensure you are always considering the best available opportunities that match your method or strategy. In a nutshell, this is how you do stock screening correctly.
For more information you can consult with our experts at Paradigm Capital Management. Paradigm Capital Management employs a disciplined, bottom-up approach when it comes to small cap investing and micro cap funds, with an emphasis on fundamental analysis and extensive management contact.
We have the expertise when it comes to small cap investment to achieve your financial goal, contact us at (518) 431-3500
OR visit us here: http://paradigmcapital.com/