I received an email yesterday from a reader who asked if I could discuss why we choose to avoid certain stocks. What I would first like to address is the idea of stock selection in general. At SMB we have a very specific methodology to select the best stocks for intraday trading. As most who have read our blog on a regular basis already know we focus on stocks with fresh news: “stocks in play”.

In general, if a stock has fresh news I will trade it. Even a stock like CAT that normally trades erratically I will trade if it reports a remarkable earnings number. My first choice if available will always be something with fresh news. The increased order flow will overwhelm most of the silly HFT programs and create numerous low risk/high reward intraday trading setups.

As a rule these are some of the scenarios I tend to avoid:

1. Stocks gapping up more than 10 points. On the Open there is too much price discovery occurring to risk the appropriate amount
2. Stocks where the CFO has resigned and there is a question as to the veracity of their numbers. These situations are messy and it is difficult at times to define your risk
3. Stocks that require me to risk more than 50 cents. I think it is extremely difficult to predict more than the next 2 to 3 points in a stock so I’m interested in risking less than 50 cents.
4. Stocks that trade under one million shares on average. Not enough liquidity to get out at a very well defined price unless you have a very small position
5. Commodities and Energy stocks. I will trade these if they are VERY In Play but normally they don’t trade in a rational fashion. Some consider stocks like AMZN difficult. For me a commodity stock has a lot of inputs determining the price. It isn’t just about the buyers and sellers but you also need to factor in the movement of the underlying commodity. I believe this is the reason these stocks tend to trade less rationally intraday.

I will talk a bit more in a future post on what poor intraday stocks look like from a charting perspective.