Scanning for candidates: relative strength and liquidity filters
Build a repeatable scan that removes illiquid and unsuitable shares, then ranks the rest by relative strength against a benchmark.
What you will learn
- Why a written scan beats browsing charts at random
- How to calculate relative strength against a benchmark index and read a relative strength line
- How to apply liquidity filters: average daily traded value, minimum price and spread
- How to use ATR as a percentage of price to keep only shares with workable volatility
Explanation
A scan (also called a screen) is a set of written filters you apply to a list of instruments, for example all shares in a set of indices, to produce a short watchlist. A good swing scan has two stages: first remove what you should not trade (filters), then rank what is left (ranking).
Stage 1: liquidity filters
Liquidity means you can buy and sell a reasonable amount quickly without moving the price much. Three practical filters:
- Average daily traded value (ADTV):
ADTV = average daily volume in shares × price, usually averaged over 20 or 50 days. Volume alone misleads: 100,000 shares of a €5 stock is far less than 100,000 shares of a €200 stock. A rule of thumb for a retail swing trader: require an ADTV of at least several million euros, and keep your own position below about 1% of ADTV, so you can exit in one go even on a bad day. - Minimum price: very low-priced shares often have wide percentage spreads and erratic gaps. Many traders require a price of at least €5 to €10.
- Spread: check the typical bid-ask spread as a percentage of price during normal hours. If the spread is a large share of your planned stop distance, costs in R become too high (see lesson 1).
Stage 1b: volatility filter with ATR%
The average true range (ATR), covered in the Technical Analysis course, measures the average daily range in price units. To compare shares with different prices, divide by price:
ATR% = ATR ÷ price × 100
A share with ATR% below about 1.5% may move too little to reach a swing target within a few weeks. A share with ATR% above about 5% to 6% needs very wide stops and tends to gap strongly. A band of roughly 1.5% to 5% is a sensible starting filter; adjust it to your style and record your choice.
Stage 2: ranking by relative strength
Relative strength (RS) here means how a share has performed compared with a benchmark index over the same period. Do not confuse it with the RSI (Relative Strength Index), an oscillator that compares a share only with its own past. Two common measures:
- Relative performance:
RS = (1 + share return) ÷ (1 + index return) − 1. A positive value means the share beat the index. - RS line: share price divided by index level, plotted every day. A rising RS line means outperformance, even if both are falling.
Common lookback periods are 13 weeks (about 63 trading days) and 26 weeks. Use the index that matches the share's market, for example the DAX or a broad European index for German shares.
Why use RS for swing trading? Long setups (lessons 3 and 4) work best in shares that already show strength, because you trade in the direction of existing demand. Historically, short- to medium-term momentum has been documented in many markets, but it is not reliable in every period and can reverse sharply, so RS is a ranking tool, not a signal to buy.
Worked example
Hypothetical example: the benchmark index gained 5% over 13 weeks. Filters: ADTV at least €5 million, price at least €5, ATR% between 1.5% and 5%, RS above 0.
| Share | Price | Avg. volume | 13-week return | ATR |
|---|---|---|---|---|
| A | €64.00 | 120,000 | +18% | €2.00 |
| B | €22.00 | 180,000 | +9% | €0.53 |
| C | €140.00 | 90,000 | +4% | €2.24 |
| D | €15.00 | 800,000 | +24% | €1.02 |
| E | €48.00 | 250,000 | +11% | €1.30 |
- ADTV: A €64 × 120,000 = €7.68m; B €3.96m; C €12.6m; D €12.0m; E €12.0m. B fails.
- ATR%: A €2.00 ÷ €64 = 3.1%; C 1.6%; D 6.8%; E 2.7%. D fails (too volatile).
- RS: A 1.18 ÷ 1.05 − 1 = +12.4%; C 1.04 ÷ 1.05 − 1 = −1.0% (fails); E 1.11 ÷ 1.05 − 1 = +5.7%.
- Ranking: A first, E second. These two go on the watchlist for setup checks.
Notice that D had the highest raw return but was removed for volatility, and B was strong but too illiquid. Excluded: costs, currency, and whether a setup actually exists.
Common mistake
Practice activity
Hypothetical data: index +2% over 13 weeks. Same filters as the worked example.
- X: price €35.00, avg. volume 60,000, return +10%, ATR €1.05
- Y: price €90.00, avg. volume 100,000, return +1%, ATR €1.80
- Z: price €12.00, avg. volume 1,500,000, return +15%, ATR €0.42
Calculate ADTV, ATR% and RS for each share. Which ones pass, and in which order?
Show solution
X: ADTV €2.1m (fails liquidity), ATR% 3.0%, RS 1.10 ÷ 1.02 − 1 = +7.8%.
Y: ADTV €9.0m, ATR% 2.0%, RS 1.01 ÷ 1.02 − 1 = −1.0% (fails RS).
Z: ADTV €18.0m, ATR% 3.5%, RS 1.15 ÷ 1.02 − 1 = +12.7%. Passes.
Only Z passes. X would be attractive on RS alone but is too illiquid for the filter.
Limitations: one 13-week period is a snapshot; a share can rank highly because of a single news jump.
Key takeaways
- Filter first (liquidity, price, ATR%), then rank by relative strength.
- ADTV = average volume × price; keep your position below about 1% of it.
- RS compares a share with its benchmark; RSI is a different indicator.
- A scan produces candidates, not trades: a setup must still be present.
Next step
In the next lesson you turn strong candidates into trend-following swing setups with precise entry, stop and target rules.
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