How I Efficiently Identify the Strongest Stocks to Trade Using Only Five Screening Criteria

When it comes to screening for standout market-leading stocks listed on the major US indexes, simplicity and efficiency are key. I use just five criteria to find the strongest stocks, such as Fastly, which recently displayed remarkable relative strength and provided excellent trading opportunities.

Understanding the Market Context

Before diving into stock selection, it's important to understand the broader market trend. For example, the Nasdaq 100 (Triple Qs) had been in a downtrend for several weeks, trading below key moving averages like the 10-day, 21-day, 50-day, and 200-day simple moving averages (SMAs). It was making lower lows and lower highs, indicating a bearish environment.

In contrast, stocks like Fastly bucked this trend by trending above all key daily moving averages and making higher highs and higher lows. These are the types of stocks I aim to identify — the market leaders that perform well even when the overall market is weak.

The Five Key Screening Criteria

To efficiently identify these leading stocks, I focus on five essential criteria:

1. Trend Filters:

   • Stock must be above its 200-day simple moving average (SMA).
   • Stock must be above its 50-day SMA.
   • Stock must be above its 21-day exponential moving average (EMA).

2. Liquidity Filter:

   • The stock's 50-day average dollar volume should be over $50 million. This helps eliminate low liquidity stocks and penny stocks.

3. Quickness Filter:

   • The stock's 21-day average true range (ATR) percentage should be around 3%. This measures the stock's volatility including gaps, ensuring the stock has enough price movement to trade effectively.

These five criteria help me cast a wide but focused net, filtering thousands of stocks down to a manageable list of strong candidates.

Why Keep It Simple?

While many platforms offer extensive screening options, including financial ratios like debt-to-sales or profit margins, I find these often unnecessary for identifying the strongest stocks. Overcomplicating the scan can cause you to miss out on great opportunities.

Instead, focusing on trend, liquidity, and volatility allows me to quickly spot the crème de la crème of stocks that are primed for trading setups.

Applying the Criteria Using Market Surge

I use the Market Surge platform for screening, which allows me to apply these filters efficiently. For example, starting with over 11,000 stocks in the database:

• Applying the three moving average filters reduces the list to 820 stocks.
• Adding the liquidity filter (50-day average dollar volume > $50 million) further narrows it to 227 stocks.
• Applying the quickness filter (21-day ATR % > 3%) reduces the list to 185 stocks.
• Excluding ETFs and closed-end funds brings the final list to around 179 stocks.

This process quickly identifies a focused list of strong stocks to monitor.

Grouping by Industry for Thematic Strength

After filtering, I group stocks by industry to identify thematic strength. For example, in the AI storage sector, stocks like SanDisk, Seagate, Western Digital, and Micron stand out.

• SanDisk: Strong trend above key moving averages, forming an inside day.
• Seagate: Displays a shakeout demand tail (hammer candlestick) off the 10-day EMA.
• Western Digital: Above key moving averages, forming a potential cup and handle pattern.

This thematic approach helps me focus on sectors showing strength, increasing the probability of successful trades.

Examples of Strong Stocks Identified

Here are some examples of stocks that meet the criteria and show constructive chart patterns:

• Fastly: Recently provided an opening range breakout (ORB) opportunity.
• Ambarella: Tightening along the 10-day EMA, showing strength.
• Twilio: Tightening along the 10-day and 21-day EMAs.
• Arista Networks: Clustering around key moving averages, showing consolidation.
• Kayak: Pushing off the 10-day EMA with a decent base.
• Lam Research: Above a cluster of moving averages including the 50-day.
• AXTI: A standout leader with strong recent price action and ORB setups.
• AMPY Exit: Strong push and tightening into the 10-day EMA, showing constructive price action.

Trading Strategy

Once I identify these leading stocks, I place them on my monitors and watch for A+ setup opportunities. My preferred setups include:

• Opening Range Breakouts (ORBs)
• Mean reversion plays around EMAs
• Trigger bars
• Shakeout demand tails
• Gap down reverse bars

This approach allows me to trade with the trend and capitalize on strong momentum.

Conclusion

Identifying the strongest stocks in the market doesn't require complex or numerous criteria. By focusing on just five key filters — trend (200-day, 50-day, 21-day moving averages), liquidity (50-day average dollar volume), and quickness (21-day ATR %) — you can efficiently find market leaders.

Grouping these stocks by industry helps spot thematic strength, and watching them for high-quality setups can lead to successful trades.

Keep your screening simple, focused, and aligned with price action to trade the strongest stocks effectively.

Happy trading!