Think of last week’s article (Equity X-Factor: Part 1) as the voice coaching, choosing the right song, pitching a wide range of notes; it was all the preparation necessary to make the next stage successful. This article shows the screening process that I used, the results and how I plan to make money from them.

What are we looking for Simon?
Lots of equity traders scan the markets for possible trades that fit their criteria. They use regular, often weekly, screenings to weed out a ‘shortlist’ of 70-100 candidates that have, for example, hit a new 12-month high/low, out/under-performed the market by a certain percentage or perhaps the volume has increased significantly. Me, I’m aiming small, too much of that stuff will require more software and time than I currently have. I’m going to focus on one or two shares and try to make a few useful trades along the way. But I’m sure it will be an evolving process, so feel free to hit the comments box with helpful suggestions.

I decided to invite my friends from X-Factor to dig out some possible shares using the criteria below and I’ll look to trade them as and when they look interesting. Remember, I’m just a simple trader. I’m not going to focus on growth verses value, highest yielding stocks, or whether the chairman’s girlfriend has a personalised number plate. I just want shares that I can trade along with my currency bets.

My judges are looking for four key criteria:

Simon-It’s got to be well known with plenty of news and comments.
I’m looking for a big national/ global company where the news announcements are made via Reuters or Bloomberg, not the golf course or a cosy lunch at the Ivy. I want plenty of news that might cause the share price to react, but I want it roughly the same time as everyone else.

Sharon-It must be volatile
I’m a trader, not an investor. I want this share price to go, go, go; I don’t care which way just so long as it bounces around and gives me plenty of opportunities to have a nibble in the middle (perhaps I should have given this one to Dannii).

Louis-It must chart well
I’m not going to have an edge in terms of information flows so I need a stock that I can trade from the charts. This should also work better on bigger companies where the charts reflect regular large trades at tight prices. The occasional large order can have a disproportionate effect on a smaller company’s share price and make a mess of the chart patterns.

Dannii- I want a tight spread
I want to cross the gain line as quickly as possible and my chances will improve the quicker I can get from the offer to the bid (or vice versa).

And the chosen finalists are..
Shazza started the process using Digital Look’s screening option. She was looking for stocks with volatility (equity guys call this Beta). Put really simply a Beta of 1 means that the stock should move in the same direction as the market, at the same rate; a share with a Beta greater than 1, like 1.5, should move in the same direction, but a with a bit more attitude. Shazza was targeting shares with a Beta of 1.5-2 and unsurprisingly came up with a whole load of miners (I’m sure there’s a joke in there somewhere), some financials and a mish-mash of others.

Next I passed the list over to Simon, who checked out the size of the companies (their market capitalization). He weeded out most of the smaller guys, handing me 2 miners and a bank with market caps over £30 billion. Perhaps strangely, I didn’t want companies on the wrong end of a bid situation; yes they have the big moves but a lot of that seems to happen before the announcement (hmmm, I wonder why).

Now, how tight could Dannii get it for me? She’d been checking out the paddypowertrader web site and was pleased with the results. A quick check of spreads showed a lot in the 2-4p region, but one of the leading candidates, Barclays, flitted between 0.8 and 1p on a 470p price. One of the other front-runners, BHP Billiton, had a spread of 4-5p, but on a price of 1372. Then Dannii revealed something else that definitely appealed to me.
“What about Google?” she purred, “ The dealing spread is only 46 cents on a price of $616. As a percentage of the price you’ll struggle to beat it at 0.07%; even Barclays was 0.16%.”

Nice one Dannii; it was certainly a large global player and though the daily price range is tighter, the spread should allow some performance. Being an American share I’ve not yet found its Beta, it’s probably called something else, but what the heck, I’ll give it a go on the demo account.
So, I’ve got a shortlist of three stocks, BHP Billiton, Barclays and Google. Barclays ticks the most boxes, but BHP’s wider daily range appeals to me, as does the spread on Google.

Where do they go from here?
The winners aren’t going out to play live straight away; I’m going to trade them on the paddypowertrader demo account for a while. I want to see how the shares respond to my trading techniques and whether I need to re-consider my candidates or my method of trading.

How am I going to trade my shares? Louis’ been looking at the chart potential and isn’t entirely sure. He thinks it will be a bit of a learning curve, adapting my basic technical analysis principles from currencies and index trading, but trying to improve the odds by being fully aware of news flows (this was covered in part 1). Unless I’m feeling particularly brave, or daft, I’ll trade with the trend and start off looking at support and resistance lines and basic candle patterns.

I’m not sure if the same moving averages work for equities; I’ll certainly keep an eye on the 200-day moving average, but I’ve also been reading up on golden triangles (or is it golden crosses?) and dead crosses. These are when the 20-day moving average crosses through the 50-day moving average (golden is bullish, dead is bearish). I know a lot of clever people use these so I’ll stick ‘em on my chart until I know better.

Right, I’ve made my decision, I’m off to fill my Hollyoaks diary with loads of dates and plug a few more graphs into my system. I just hope my stars survive longer than most real X-Factor winners. If not I’ll be on Celebrity Equity Market, Get Me Outta Here.