Today's Quote: “There are two great rules in life, the one general and the other particular. The first is that every one can in the end get what he wants if he only tries. This is the general rule. The particular rule is that every individual is more or less of an exception to the general rule." Samuel Butler, the Younger.

Yesterday we introduced the topic of understanding where we find various plays throughout the day. We ran through the five lists or ‘weapons’ that we use every day. Today we are going to expand on the first watchlist, the one made nightly after the market is closed from daily, weekly (and sometimes hourly charts).

Let’s begin talking a little bit about preparation for finding plays on the daily and weekly charts. Preparing for the market means creating a watchlist. To prepare a watchlist of the best candidates, we need to look through many charts. This process is called “scanning.” The more charts you scan, the better the odds of finding the plays you want. The trade off of course is your time. You cannot easily look at eight to eleven thousand stocks every night.

One of the first things we need to do as traders is to have what we call a personal ‘universe’ of stocks. It is a subset of the whole market and has just the stocks that you will scan on a regular basis to look for plays. The size of your universe will depend partially on what time frame you are playing and what volume requirements you will have in order to play that time frame. For example if you are playing a core trade that you plan on holding for weeks, the need to enter within a few pennies of the entry point is less important so you can live with a much lower volume requirement. This opens the door to many more stocks being available to be in your universe. If you are day trading with a high share size you will need stocks that have a higher average daily volume, and this by itself will decrease the number of potential stocks that can be in your universe.

The simplest way to create a larger universe is to start with all the stocks out there. Grab or combine the biggest lists your trading software has. Then sort them by price, and eliminate all stocks under two dollars, or one dollar, or fifty cents, or whatever you choose. It depends how small you need the list to be. Then sort by volume and do the same thing. You should redo this process periodically to make sure that as the price and volume of stocks change; they are dropped off or added to the universe list appropriately. This is a way to create a universe of any size, but particularly useful if you need a large watchlist for swing and core scanning. We will continue this process tomorrow.