There is a common saying going around that one can never do too much research, the more preparation the better. While that is in fact true up to extent there is also slight downside to doing too much research. Overall every individual will create certain bias on the asset, proportionally to the amount of time that is put into researching specific topic. Usually the more time it is in-putted, the stronger the bias, especially with less experienced traders or investors. Experienced performers who played on their research many many times will be able to know over time how to handle the bias with certain approach to neutrality, but for beginners it usually is not surprising to see that individuals tend to get too strongly opinionated once they input decent amount of time into researching specific topic.
Having realistic bias and disconnecting or flipping that bias is something that can NOT be taught, it is something that only individual learns trough repetition and failure. Experienced trader or investor will know when to disconnect his/her bias from the research made as the key variables start to go against that initial thesis / bias, while less experienced trader might not know that lesson yet. Being open minded is the critical component of research and thesis component, always being willing to flip the side. As i mentioned before in trading you should not strive to be US or China, instead be Switzerland always staying in slightly neutral pose willing to jump the side as needed. Your job in trading is to always follow the stronger side, thats it.
Every trader should strive to be research oriented, and trying to learn as much about markets as possible, but it is important to understand that creating decent thesis or bias on trading ticker and having flexibility to know when the bias no longer makes sense is something that requires trial and error to get used to. Mind that the more time you input into researching something, the harder it will be for you to switch your thesis or conclusion that you came up with.
To spend 10 hours on research, forming a thesis and then flipping that thesis within a 5 minutes of price action trading as the thesis no longer makes sense, is something that no-one is born to be good at. It takes a lot cases where you remain stubborn and market will punish you for that, and over time you will eventually understand how to adapt better with quicker flip on opinion.
Just wanted to out-line that concept before the article gets deeper because just because the variables in your research perfectly point towards potential thesis / conclusion, it does not mean that this is certain to how price will respond. In fact, the research on asset should only be your guide, not your entry or trading reason. It is just something that outlines potential scenarios that are reasonable, correlated to the variables that you found out in research, nothing more than that.
Researched trader will usually out-perform non-researched one
This usually applies to be the case, if you are well researched on the current trading asset, you are likely to have more realistic bias towards what asset might do, compared to a trader who just sat in front of screen and starts to trade random ticker.
There are some extraordinary traders who input nearly 0 research into trading each day, come in front of screen and have amazing performance. BUT this should not be mistaken, this is only because they have huge amount of experience and their "research" is baked into their subconscious mind already trough the experience of mistakes. Beginner trader should strive to try as much as possible doing proper research.
Research variables on trading ticker (equities)
Each day my usual research procedure on ticker is constructed from researching the variables displayed on article bellow. Researching key variables is all about potential possibilities of price moves that each variable is linked to. Mind that i said possibilities and not probabilities ! Why? Because when we are talking about probabilities in trading, it is generally a very specific setup that has quite a decent chance (lets say 65% chance) to perform in specific direction. Research variables if isolated (one by one) have no such probabilities, their isolated performance ratio is far lower. Each of them only opens certain window of what is possible to happen on asset, but just that variable by itself does not mean that this by itself is high chance. Probabilities are always backed by orderflow as well (tape+volume+price).
For example lets use variable "float" as example. Lets say that low float on asset is variable that trader correlates with possibility that asset with news and low float might have chance of decent % move (20% for example). This is only a possibility because the actual statistical performance if truly all low float+news linked assets are counted, the data is way too mixed, giving trader a lot of noise in the data. Which means that trader can say IF low float+X+XY+XZ+XZZ then perhaps it is not just a low possibility anymore but it might enter into higher possibility chances, meaning that if enough "right one sided / bullish" variables are linked together then the chances increase that such research is worth considering for slightly bullish bias on asset.
Thus research needs to be deep enough and variables should line up within same direction (bullish or bearish) because if they do not, then trader should not be considering any conclusion from the research data. It is too much noise. Which means that realistically in some cases trader will be able to come with decent thesis on conclusion of research and in other cases not, that is completely acceptable. It is okay to not have opinion on ticker even if you had to spend a lot of time on research. Market does not owe anyone charge backs on time.
Daily watchlist procedure on equities
Bellow is outlined my daily process of research on trading ticker that might have news in pre market and is worthy to be placed on watchlist (basically main asset at play). This is relatively simplistic way of research and is by no means the only way to do it, it is just my personal way. One can go much more in depth with research, for my own trading style i found the research bellow to be sufficient enough.
News
Type of news:
-mergers
-biotech phase 1 / 2 / 3 news
-lawsuits
-shock catalyst (fires, disasters, etc..)
-de-listing from Nasdaq
-...
News are perhaps the most deceptive variable when it comes to research. The correlation % factor of the type of the move that stock has relative to what type of news it has is very noisy, un-even, especially within news of the same sector. For example two stocks with very similar type of news might perform completely differently on that day.
Many traders tend to conclude the news in different ways, especially if news is in rather complex sector (biotech) or the news is not very black and white (sounds bearish but has under-laying bullish variables). Therefore it is important to understand what makes a really solid news catalyst that trader should prioritize in his research as very important and worthy, and what sort of news are the ones that trader should perhaps exclude from research thesis, or maybe give it secondary priority:
-freshness:
By that is meant that if trader catches or trades on price where the news is completely fresh, chances are that news is not yet priced in. The longer that times goes on, the less fresh the news is and the more likely it is that news is now getting priced in. Obviously this is very crude way to look at it, because it completely depends on other factors whether market will price in news within 5 minutes, 5 hours, 5 days or in some cases even 5 weeks. Other external factors will dictate how long will it take to price the news.
Practical rule: If you are very quick on fresh news, chances are ...it is not yet priced in and it will affect the flows of price.
-directional strength:
If news is clearly bullish with obvious and rather simplistic writing where even un-experienced observers can make a solid conclusion on whether the news is negative or positive, then that would qualify as clear directional strength. If news is confusing, very deceptive as many news in fact are, then that might require a lot more experience and effort for trader to come to conclusion, which in fact will leave market confused with many different traders reacting differently to the news.
Practical rule: The cleaner the news is to conclude, the more cleaner the directional response of price might be.
-surprising news or recycled:
If news is surprising it has larger chance for price to respond with decent magnitude and to hold the price. If news is recycled (re-published news that has been published already few days or weeks ago) it has more chance of such price move to be faded / reversed. Basically market saying: What else is new?
Practical rule: Prioritize giving more attention to news that are not recycled. Check a bit on each news around the internet if such news was perhaps already published before, in many cases it wont be, but some news are recycled.
-news is aligned with long term performance of trading ticker or not:
What is meant by that, is that in asset where strong bullish news is aligned with long term bullish trend on such ticker and if news is surprising it is much more likely for asset to sustain that price move on the news over longer while, as oppose if bullish news is released on asset that has long term down trend (dilution ticker for example). Long term trend and fundamental performance play role in how the asset overall is able to hold the news price reaction over short and mid-term.
Practical rule: Check the daily chart of the ticker traded. If ticker is in bull trend and news are bullish it has decent chance to hold the price. If ticker is in down trend and news are bullish it has more chance to fade the news over certain time (return to reality).
Again above "rules" are not something that trader should trade on! It is just a guide to potential possibilities and as long as there are more variables that line up in same direction then chances for that possibility thesis increases.
Example of shock catalyst news on ticker VALE (unexpected catalyst that market cannot price ahead, the damage and size of potential lawsuits for company is very high relative to market cap, making the news significant):
Example of Biotech phase 1/2 news:
https://www.globenewswire.com/news-release/2019/10/29/1936986/0/en/Krystal-Biotech-Announces-Final-Update-from-Phase-1-2-Clinical-Trial-of-KB103-bercolagene-telserpavec-B-VEC.html
Apple and ROKU partnership news (also decent news catalyst that is hard for market to anticipate ahead, thus giving decent trading opportunity on the day it is announced):
https://blog.roku.com/en-gb/apple-tv-plus
Float
One of the primary variables that i check is float of the trading asset. There are few reasons why. Primary reason is very personal reason, for me personally my biggest winning trades are always on very small floated assets such as float under 3 million shares. Thus for me i want to identify such ticker as fast as possible and put the most attention to it, because my trading performance has very strong positive correlation to the lower the float-the bigger the gains. It is not just random correlation, there is specific reason for it, being that large portion of nano float assets (2 mil or under float) are rigged by market makers and those tend to be strong long and short opportunities. This is my personal reason and for other traders it might not be the case at all, or even it might be negative correlating factor to performance (low float), thus which variables in research one puts at primary focus might be different from trader to trader.
But overall there is additional non-subjective reason why knowing a float opens certain possibilities on asset. Small float assets are easier to manipulate, and they are also easier to move with less capital size, which has some correlation to the fact that the lower the float (and market cap) the quicker can asset make larger % move in single day. It is not unusual to see nano float asset on tiny market cap company going up 100 or 200% in single day. On high float asset such behavior is more rare in terms of % and volatility.
Thus float itself gives trader some guide on what might be the possibilities for that trading ticker. But again to say, do not isolate variables. Just because one variable such as float points toward certain possibility it is always better to have more than just one variable to point towards such possibility to increase overall chances of the thesis.
But bellow is just very simplistic way to look at it, or how to use the float variable:
-low float : chances for quicker large % moves, more chance of manipulation
-higher float: less chance for quicker large % moves, less chance for heavy manipulation
Bellow are two picture examples of small float ticker (2 mil float) and one of large float ticker (140 mil float):
One thing to keep in mind, in certain cases the float might not be reported accurately across the sites (many reasons, could be recent reverse split, lack of data...), in such case trader is left with two scenarios to calculate float. One is to check latest fillings of company on site like bamsec.com to check their latest outstanding shares reported and how much do institutions hold shares of company. In such case trader has to use OS (outstanding shares) and substract the institutional shares out from OS (plus insider holdings) to get the real float. The float are only the shares that traders can buy on open market, outstanding shares are however all shares that company has outstanding which also includes IO and IS shares.
Most common reason for un-accurate float report is the fact that company just did recent reverse split. If trader sees such recent news for company then trader has to manually calculate the float, because all the sites will most likely report wrong float for at least 1 week if not more. Thus in such case check the outstanding shares of company (OS) and then check institutional holdings (IO) and then also how big the reverse split is in terms of X (1:10, 1:50, 1:100...) .
To calculate float accurately in such case is:
current OS-minus IO shares divided by reverse split number.
Websites that provide float reports:
www.gurufocus.com (usually quite reliable reports)
https://quotes.wsj.com (personally i like this one the most)
https://finviz.com (the least reliable site, often outdated)
Market cap
Market cap could also be variable that provides some possibilities if it is connected to low float as well. Often small market cap company will also have low float, which means that those variables will already be by default in decent correlation, but not always. It helps to check if company has very light market cap (for example 5 million USD) and also small float, then such ticker might be easier to manipulate since it takes much less capital for market makers to play around with such ticker. The bigger the market capital the more capital has to be placed into trading ticker, especially if float is also not that small. Think of it this way it takes 10 million to double the market cap of company that has initially 10 million size of market cap, while it takes 100 million capital to double the market cap size of company with initial size of 100 million USD market cap. Thus making such higher market cap company much more difficult to manipulate as it truly takes big boys to come into such trading ticker to do such job.
In most cases i will personally ignore market cap variable, unless it matches perfectly to the float increasing chances for easier manipulation, thus:
Practical rule: If market cap is tiny (under 10 million, but better even under 5 million) and the float is very small (under 2 million shares) then i will prioritize that combo variables as important to the research thesis, since many heavily manipulated tickers have those two variables present (check other blog article "short traps on rigged stocks").
To check market cap there are many sites to provide that info (just search ticker name on each site):
https://www.nasdaq.com
One thing to keep in mind, the data across different sites might differ. That is why its always good to know which sites are more accurate (gurufocus.com) and which are less (finviz.com) especially if they are outdated. It is also good to cross check across few sites and use average as the number.
Example of market cap display for ticker KRTX on site nasdaq.com:
Short interest %
Personally for me it is secondary variable, it is something i always check but realistically it does not play a role in most cases on trading asset. In certain unusual cases it can however play huge role in the way asset is behaving, especially if shorts are very aggressive and strong market makers keep bidding the asset to squeeze the shorts out. From practical reasons heavily shorted assets will be more of anomally across 100 picked random tickers. There are however certain tickers like TSLA that are hugely shorted pretty much day in day out.
Practical rule: Check the short interest on asset (relative to float), if % is over 30% then it might be worth adding into research thesis, but especially the ones that should be placed into thesis are the assets that have short interest above 50%. Those will have the most meaningful impact for potential short squeeze and lift of price.
Sites that display short interest on tickers are:
Also take the short interest reports with grain of salt, there have been many publications that the numbers on each report could wary a lot and are not highly accurate. So take it with certain % plus / minus bias. For quality short report data usually only hedge funds or institutions willing to pay decent amount will have access to.
Example of short interest on trading ticker CLVS with very high short interest and the progressive short squeeze following on the asset within few dyays:
Is stock easy to borrow (ETB)
This variable might be important if asset has strong short exposure (interest) already, and the asset has small float. By itself ETB is not very important variable on high cap asset with very big float, but if right variables are placed together it might place role. ETB basically means that traders at specific broker (or many brokers) might have access to short selling without paying fees to do that. This often proceeds to more traders participating on short side than if asset was not under ETB, as many traders shy away from paying high HTB fees.
Practical rule (for small cap trader): If asset has small float and decent short interest % then having information if stock is easy to borrow at certain broker might be advantage and worth including into research thesis. Or especially if there is more than just one broker with ETB even more so, but realistically that will not happen often. Most practical way is just to ask few traders who use different brokers if any of them have asset as ETB or open accounts with multiple brokers.
Institutional ownership
This is relatively quick to check, in small cap stocks it will often be relatively low (10% or under). The cases where trader should take notice of is if stock is small cap but it has institutional ownership above 40%. In such ticker institutional players might manipulate stock as they often do.
Site that i like to use to check IO % is: www.nasdaq.com
Practical rule: If IO% is above 40% take it into the research thesis, if it is under, especially under 10% then neglect it.
Trend of institutional holdings
Progression of accumulation on institutional holdings might be variable worth inputting into research, but realistically in majority of cases there will not be any major anomalies especially not for short term trader. For investors yes, will be something to take much closer look into, but for short term trading it mostly will not play the importance, however there are some cases where institutional ownership might be increasing drastically over last 2-3 months providing insight into something big incoming on the trading ticker.
Practical rule: Secondary or third grade variable, worth looking into if having few more seconds on research but often neglect-able.
Use fintel or nasdaq websites to check for trend of institutional holdings increasing or decreasing, bellow example on ticker KRTX:
Insider buying
Insiders buying ahead of pre-planned news on stock or conference might point towards news to be potentially future bullish and insiders know something that you do not know yet.
Personally i remember only 2 tickers with obvious sized insider buying and following decent bullish news, where stock did had abnormally well performance over 200% shortly after that (OGEN and some other ticker i cant remember). But those cases are rare, practically it is not important variable that i add into research thesis because it is rare.
It is also hard to gauge for retailer, what is strong or what is weak insider buying? One would have to know the approximate income stats of such insider to know what is considered as "going all in" size, and what might just be spending few % extra of the income. It is variable that requires a lot more deep research for one to capitalize on it realistically. Well worth the time of hedge fund analyst but not so much of retail trader.
I am willing for anyone to provide conclusive evidence with consistency that i am wrong on that, but so far from what i have seen it is not very repeatable variable.
Practical rule: Third grade variable, only will give it slight check here and there but often not. (might be due to lack of research and data on it, take it with grain of salt).
Fundamentals of balance sheet and cash on hand
This is the most time consuming part of research as it takes a bit of digging. For beginners it is best to pick up some books or videos that explain in details how to read SEC fillings and balance sheets of companies. This is not something that should be done without having some basic understanding first.
Practical rule:
Three major things to look in SEC fillings or balance sheet:
-does company have history of dilutions (previous S-3 shelves or 424B4/3/2 prostectus)
-does company have active open shelf to dilute
-does company have low cash on hand and needs to dilute / raise capital soon
If company has history of dilutions then it often means that company will repeat that behavior because there are structural factors of why company needs to do that in first place, which in majority cases is that company is unable to create positive cash results (is loss making). But this information on itself is not enough, trader needs to check if company has actually active dilution in terms of shelf or prospectus filling opened, or at least is able to do so soon.
Additional thing to also check in fillings are warrants, if company has any outstanding warrants and at what price are they, it might play a role into potential over-head supply.
The site that is very clean to use for research on balance sheet and fillings is:
Basic overview of what to focus on in research of fillings:
To check how much cash does company still has on hand currently, open up latest 10-Q filling, then first check how much cash did company last reported to have:
Then check how much cash burn do they have. For that scroll down a bit or press "ctrl+F" and type "cash flow" and it should direct you to portion of 10-Q report where the cash flows are listed. Take a note how big loss did company produced and over how many months, then calculate / divide to see how much does company burn per month.
Then the last part comes in. Use the last reported cash on hand number and note how many months was since last 10-Q report and use (months passed*monthly cash burn=current cash on hand (likely)). This equation is not 100% reliable but it does come close enough to be useful. If turns out that company has very little cash left then the dilution might come in play soon, depending if company can raise or not.
Companies can raise capital with offering either in pre market (most likely), after hours (less likely) or intraday.
Bellow is example of when fundamentals played part in how ticker performed as the company raised offering and crushed the tickers price (APDN). Company had low cash on hand and had recent reverse split, and as the ticker moved a lot in day 1 the company used opportunity to raise capital as often happens.
Small cap priority
Just to note that most of the article is focused around watchlisting the research for small cap equities, the research procedure applies the same to any stock, but certain specific things mentioned in article are much more common to small cap stocks in general (reverse splits, low floats, poor balance sheets, not important institutional holdings, ....). But overall each variable by itself applies across any stock no matter if small or large cap.
Gap and crap historical performance
Especially in small cap equities it is often good idea to check if stock has strong consistency of fading each gap that it opens on news day. Assets that have consistency of behavior around key events, tend to repeat that behavior because there is a reason in first place why that behavior is taking place, in case of consistent gap and fades it might be too much overhead supply from down-trending stock and bad fundamentals along with other reasons.
If asset pushes strong in each news event and then fades that is something to listen to, which is different from gaping up and then fading straight away. It tells trader that price behaves different from the market open. If there is gap and fade (consistently) it means price goes up in pre market and then fades from open, but if there are big push spikes on daily chart and only then fade, then it means that asset actually has strength to push from open with solid move before it eventually fades. Thus both moves fade, but each with different intraday performance, important difference.
Practical rule: Check daily chart, how many times price fades on news days and if so how does it fade, is it gap and fade, or is it spike and fade. That distinction in behavior tells different story for research. Also mind, this variable (gap and crap) is mainly relative to small cap stocks. Larger cap stocks tend to have different behavior.
Example:
If you are beginner trader you might be overwhelmed by all the variables outlined, you might think it takes 2 days to conclude research on trading ticker. It does take some time to research and understand each variable well, asking questions and doing your own research. But once the practice is put in, the process of research on each ticker becomes relatively fast, usually it takes only around 5 minutes on average to complete full research procedure with all variables outlined above, once you know what to look at. And surely as a serious trader you should be willing to sacrifice 5 minutes of your time on your priority traded ticker just to have better insight into what might possibly happen on it.
Bellow is outlined some practical example from ticker traded in last several days:
Ticker: CANF
-float: 2.5 million shares
-market cap: micro cap under 10 million
-institutional ownership: neglectable (5%)
-news: poor earnings report (expanding loss y/y)
-ETB: not ETB
-short interest: under 20%
-gap and crap historically: has history of consistent gap and fades, aprox 5
-fundamentals: poor balance sheet, has low amount of cash left (needs to dilute soon)
Thesis / bias / conclusion:
Using all the variables and weighting them together, my personal view was it might push in pre market a bit but then it should start fading sooner or later with full end of the day fade. Ticker has history of dilution (very bearish), history of consistent gap and fades, is not ETB, does not have major short interest (underwater shorts), has no institutional holdings which all weights it towards bearish side of conclusion. Since it is small float and small market cap i always keep open mind on those kind of tickers in case if they get rigged to quickly scrap the initial thesis and start having long bias.
Performance of ticker on that day:
Thesis conclusion
And remember the point outlined above on the article. Your thesis / bias on asset is not something that you base your trades of! It is just something to guide you and give you what you could possibly expect as long as your research correlates to the variables present. The entries on your trade should always come from orderflow (volume, level 2, chart pattern) never from research thesis alone. Research thesis does not give you accuracy, it gives you big picture perspective, but the accuracy of entries comes all from orderflow.
Thank you!
Thanks for sharing. The article is very helpful.
Awesome blog! I see so many people talk about daily routine and mention news, float, IO, etc. But that's all they mention and don't provide context into what each of those actually means for the stock. Thanks for the detailed breakdown. Truly awesome! I will end up reading this many times and referring back.
Thank you so much