How to Find Leading Stocks is a guide to help you find the strongest stocks for your watch-list.
Stock selection is a crucial component for both traders and investors, and most of the time it doesn’t get the attention it deserves.
Throughout this post, we’ll define what leading stocks are, why you should care, and then walk through a handful of different ways to identify them.
I’ve also recorded the contents of this article in video, so if you’d rather sit back and listen, and probably hear me go off on some added tangents, click the play button; otherwise read on.
What are leading stocks?
There are a lot of rigorous definitions we could impose to classify exactly what qualifies as a market leader, but I’m not a fan of strict definitions when it comes to something like this.
Every trader will have slightly different time-frames and expectations for what they consider a leadership stock, so let’s instead, keep our definition broad while still outlining a few key characteristics.
First, keep in mind that leadership is just another word for strong.
So when we say we want to find leadership stocks, we’re really saying we want to find the strongest stocks.
In general, there are two key characteristics that define a leadership stock:
- It’s trading in a well-defined uptrend.
- It is at the top of the relative strength list.
A day trader may only care about stocks that are leading on the day; a swing trader, stocks that are leading over the past 30 to 90 days; and a position trader, stocks leading for 6 months or longer.
Why focus on leading stocks?
True leading stocks should represent names rising at the fastest rate and should remain resilient in the face of market volatility and pullbacks.
They’re also stocks that should provide opportunity for a long period of time (relative to trader’s timeframe), not just a one-time setup.
If you’re a trader or an investor that is looking to profit from higher prices, then finding leaders should be a primary focus in your stock selection process.
How to find market leaders?
The great thing about searching for leading stocks is that they’re not all that hard to find.
We know based on even our general definition from above, that they’re stocks in an uptrend and stocks that have clear relative outperformance.
Given that, we can construct a handful of different ways to quantify that search and, depending on your time-frame and how demanding you want the out-performance to be, you can adjust accordingly.
For the scope of the following examples, we’ll use a swing/position trader’s timeframe.
Find leading stocks using the 52-week high list
The most straightforward way for finding leading stocks is the 52-week high list.
The stocks that appear here are trading at their highest levels spanning over the past year and leading stocks will generally hang out on this list for long periods of time.
Reviewing this list daily is your first way to build a watch-list of leading stocks.
Find leading stocks by scanning for names up big
Looking at raw percentage returns over a given time period, say, up 15%+ over the past 1 month, will lead you to strong stocks.
This approach, however, does have some risks.
With this type of search, you have a higher likelihood of finding false positive leaders.
Stocks that fall into this category might be up big recently but are not really legitimate market leaders in a structural uptrend at all.
Events like earnings, or even badly beaten down names that are temporarily bouncing from oversold conditions can be picked up in this type of scan.
The pro to this type of scan is that you can catch new upcoming leaders earlier than many other traders. Names that perhaps haven’t hit the 52-week high list, but are starting to build their reputation.
The bottom line: some additional due diligence is advised for this approach.
Find leading stocks using monthly charts
This is my go-to approach for finding leading stocks.
Choose your favorite scanner (mine is TC2000) and only look at charts on a monthly time-frame.
Using a simple trend filter, I look for stocks that are not only in long-term structural uptrends but also names that pass some additional personal preferences:
- No major immediate overhead supply.
- Reversal candidates off major support.
- Clean historic mover, not lots of sideways chop.
Remember these types of patterns and characteristics are assessed on a monthly chart, which means setups often take 6 to 12 months or longer to be ready.
When I ultimately move down to a daily chart to execute and refine my timing, I can be sure the big picture is in my favor.
Find leading stocks using relative strength
If we were limited to just one indicator to find leading stocks, the easy winner would be Relative Strength.
To be clear, we’re not talking about the popular momentum indicator, RSI (relative strength index).
We’re talking comparative relative strength versus the S&P500, or some other benchmark.
In TC2000 there is a Relative Strength 1-Yr (vs S&P500) indicator you can search, sort, and scan on.
Here’s a chart of $AAPL with its Relative Strength below, and an easy scan window with the relative strength scan condition. For a guide on scanning in TC2000 check out this post I recently published.
In Stockcharts, you can create ratio charts to identify relative strength.
Here’s one below of Apple versus the S&P500:
By pinning down stocks that are at the top of the relative performance heap, you are guaranteed to get some market leaders.
Find leading stocks using leading sectors
This method requires an extra step of ranking sectors before looking at any stocks, but it can pack a nice one-two punch for added refinement.
Instead of hunting directly for leading stocks, start with a relative strength study on the individual sectors to find which sector has been outperforming.
For example, using Stockcharts interactive performance charts, we can easily identify the top sectors over a certain time period:
From here, we can dig into the top stocks that are contributing most to that sector’s outperformance and focus our attention on the strongest names, within the strongest sectors.
How to trade leading stocks
Trading leading stocks is arguably easier than finding them.
There’s only one thing you need to know:
Buy a breakout, trade a pullback, let it come down to the 50-day moving average – whatever makes sense to you and fits your strategy, is what you should do, and ideally, the sooner the better.
When it comes to trading leading stocks, I’ve come to realize over the years, waiting for the perfect setup isn’t nearly important as just getting involved.
Why? Because often times the strongest names do their very best to prevent “easy entries” and leave the majority of people in the dust waiting for a pullback.
Get involved, even if it means establishing a half size or smaller position until a better risk adjusted entry presents itself.
How to find leading stocks
Finding leading stocks should be a routine that every active trader and investor makes time for.
I carve out one day a week, generally Saturday or Sunday, to run through my process for finding market leaders and prepare a list of stocks for the trading week ahead. If you want to subscribe to the leading stocks that we curate and trade weekly, check out The Trade Risk’s leadership list here.
I hope this post has been informative for you. If you have any questions or feedback, feel free to leave a comment below or contact me directly.
Thank you for reading, and good luck trading.