Three Types of Stocks to Trade
If you’ve ever built a watchlist, found five “great” setups in the same sector, then frozen at the moment of truth, you already know the real work isn’t spotting a setup. It’s choosing the right stock to trade, at the right time, for the right reason.
This post breaks down three types of stocks to trade and how to think through selection when several stocks look good at once.
The Three Types/categories: how to think about stock selection
A stock can fit more than one category, and that’s usually a good sign. More boxes ticked tends to mean better odds, assuming the setup and risk are right.
The three categories:
- True market leaders (TMLs): driven by big earnings, big sales, strong estimates, and quality sponsorship.
- Momentum leaders: faster-moving stocks with high volatility (high ADR%), strong short-term relative strength, and trader-friendly movement.
- Group/theme leaders: stocks that lead within a sector or theme that’s showing clear relative strength (solar, gold miners, defense, oil and gas, and more).
A big idea ties all three together: the market rotates. Groups lead, then cool off. Leaders change. Your job is to stay aligned with what’s strong, not what’s familiar.
Type 1: True Market Leaders (TMLs): where the biggest winners come from
True market leaders are the stocks that institutions can’t ignore. They’re usually backed by a strong fundamental story, and the chart action tends to reflect that.
What makes a true market leader?
The base framework comes from William O’Neil’s work in How to Make Money in Stocks (often associated with CAN SLIM). On top of that, there are a few extra things to look for that overlap with momentum behavior.
Key traits of a TML:
- Earnings per share (EPS) growth that’s accelerating, ideally pushing toward all-time highs
- Sales growth that’s strong, often accelerating too
- Estimates that point to more growth ahead (current year and next year)
- Improving margins (when available)
- A big addressable market, sometimes tied to expansion into new regions
- Institutional sponsorship and liquidity, often reflected by high 50-day dollar volume (think $50M, $100M, $500M, even $1B+)
- A clear story, such as a newer company, a new product cycle, or a fast-expanding market
The technical setup still matters, but the point is to stack evidence. One factor isn’t enough.
Earnings matter more than most people admit
There’s a quote often credited to Ben Graham and echoed by Warren Buffett:
In the short term, the market is a voting machine, but in the long term, it’s a weighing machine.
The “weighing” part is earnings. Price will swing around, sometimes wildly, but strong earnings and future earnings expectations tend to pull the stock higher over time.
Another quote used here comes from Nicolas Darvas:
Earnings and expectations of future earnings propel share prices higher.
That framing helps explain why great stocks still “wiggle and jiggle.” Nothing goes straight up forever, but over time, earnings growth is the force that can support big trends.
How to read the EPS line, the RS line, and the “rate of change”
When studying true market leaders, a practical way to think about it is:
- Is the EPS line rising strongly?
- Is the relative strength (RS) line rising too?
- Is the rate of change improving, or slowing down?
That third point matters more than most traders expect. The market doesn’t just care that earnings are good. It reacts to whether earnings are getting better, or getting worse.
Please watch the video for examples.
If you want to study this style more directly, tools like MarketSurge are referenced in the session, including its EPS and estimates displays (see the MarketSurge discounted trial).
Real-life TML selection: how to choose between similar stocks
A common situation: several stocks in the same group set up on the same day. Oil and gas, defense, banks, miners, all of them can cluster.
The job then becomes decision-making, not chart spotting.
Example from video: FTI vs. XOM (oil and gas related)
Both setups can look “fine” in isolation. The difference shows up when you compare technical strength, risk, and fundamentals side-by-side.
| Factor | FTI | XOM (Exxon Mobil) |
|---|---|---|
| Technical position | Holding around 10 and 21-day EMAs (stronger) | Pulling back to 50-day (weaker structure) |
| 20-day ADR% | ~2.84% | ~1.86% |
| Initial stop concept | ~1.5% (favorable vs ADR) | ~1.67% (tight, but slower stock) |
| EPS YoY (recent) | +367% then +540% | -27% then -27% |
| Sales YoY (recent) | +20% then +20% | -12% then +2% |
| Avg dollar volume | ~$122M | ~$2B |
Even though XOM is far more liquid, FTI stood out on:
- Better earnings and sales growth
- Stronger chart structure (10 and 21-day area vs 50-day test)
- A cleaner risk-to-volatility fit when comparing stop size to ADR%
A key point here: a fixed 7% to 8% stop for every stock doesn’t make sense if the stock’s normal daily movement is far smaller. ADR% helps you “size” the risk to the stock’s behavior.
Example from video: RTX vs. LMT (defense)
This comparison leaned heavily on relative strength and chart position.
- RTX was stronger structurally, sitting higher in the range.
- RTX also offered a tighter initial stop concept relative to its ADR% (around one-third of ADR in the example).
- LMT looked “okay” on the setup, but weaker when compared directly to RTX.
This is why grouping “brother/sister” stocks is useful. Looking at one chart alone can fool you.
Example from video: HMY vs. PAAS (precious metals)
Both looked constructive near key moving averages, but the zoomed-out view changed the decision.
- HMY was much closer to highs and showed clearer leadership in the bigger picture.
- PAAS had earnings coming up, which adds trade management risk and can affect related stocks in the theme.
Earnings proximity matters. Even if your stock isn’t reporting, a major peer reporting can move the whole group.
Type 2: Momentum leaders: fast stocks with trader-friendly movement
Momentum leaders can produce big percent moves in less time, but they demand tighter thinking around volatility and exits.
Momentum leader checklist
Core traits highlighted:
- High 20-day ADR%, ideally at least 3% (about three times the major indexes, which often average around 1%)
- Liquidity, often using 50-day dollar volume (a common lower bound used is ~$100M)
- Clean movement and trends, not choppy behavior
- Short-term relative strength, where RS has clearly turned up over 1-week, 1-month, or 3-month windows
- Sometimes a polarizing story and high short interest, which can intensify moves
Short interest levels discussed:
- Above 20% is high
- Above 30% is very high
- Above 40% is extreme (rare when the chart is also setting up well)
“Character” matters: study how the stock trends
Momentum names don’t move like Microsoft or Apple. They tend to:
- Build bases
- Explode higher
- Get extended
- End in climactic moves
- Then correct hard
The practical takeaway is simple: study how a stock moved in past trends, then decide what selling approach fits that character.
Examples used to illustrate character:
- PLTR: showed clear phase cycles (base, trend, top, downtrend), then later built a new base and pushed again.
- COIN: had a very high ADR% (7%+ in the example), and showed it could trend off the 10-day EMA with repeated shakeout-style bars.
- MSTR (MicroStrategy): very volatile, often better managed with faster trailing tools (10-day behavior and “lower-the-day” style stops when extended).
High short interest “cherry on top”: Carvana and GameStop
Carvana was shown with a short interest around 43% at one point. Combined with a quality base and strong movement, that type of backdrop can add fuel.
GameStop is the extreme case study:
- Short interest was described as around 140% during the 2021 run.
- Studying its gap behavior showed a tendency to “gap and fade” often.
- The planning idea was to wait for pullbacks toward the 10 and 21-day areas, instead of chasing gap strength blindly.
Type 3: Group and theme leaders: trade where the market is already paying attention
Groups and themes are where you often find clusters of setups. You might see multiple miners, multiple solar stocks, multiple data names, all setting up together.
The way to handle that isn’t guessing. It’s building a repeatable selection process.
The ETF “bucket” idea
An ETF is a bucket. The bucket is filled with component stocks.
If the ETF is acting well, it often means several components are acting well too. Your next step is to look under the hood and find which components are leading.
Solar example from video: TAN vs the S&P 500
A solar ETF example showed a period where TAN gained about 34% while the S&P 500 was down about 4%. That’s clean relative strength.
A major point: indexes can look ugly while leading groups set up and break out. If you wait for the indexes to look perfect, you can miss the strongest pockets.
Within solar at that time, several stocks set up on the same day (ENPH, CSIQ, FSLR, SPWR). The selection came from comparative strength:
- SPWR and CSIQ held up better and showed stronger action.
- FSLR looked weaker relative to the group.
Metals examples from video: SIL (silver miners) and COPX (copper miners)
These examples focused on pullbacks:
- Strong ETFs pulled back to the 21-day EMA with bullish reversal-style bars.
- Major indexes were weaker, sometimes below key moving averages.
- The distance above the 50-day helped show who was strong and who was not.
A simple way to frame this: pullbacks often reveal leadership. If the market slides and one group barely dips, that’s information.
Avoiding weak groups: HACK (cybersecurity) and MOO (agriculture)
The cybersecurity ETF example showed relative weakness, losing key moving averages while the S&P 500 held up better.
The agriculture ETF example highlighted repeated 52-week lows on the RS line. The message was blunt: if a group is underperforming for months, you don’t need a story to justify avoiding it.
It’s easy to get pulled into headlines. It’s harder, and better, to stay aligned with price and relative strength.
Gold miners example from video: GDX and finding the leader (HMY)
A detailed comparison used GDX as the bucket, then looked at several components (HMY, EGO, AU, NEM, SAND).
A practical elimination process:
- If a stock can’t beat the ETF structurally (lower highs while the ETF is breaking above a key level), it’s not the leader.
- That narrowed the focus to HMY and EGO, both of which made higher highs.
- When comparing pullbacks, HMY held key prior levels better, which pointed to stronger support.
Fundamentals were then layered in:
- HMY showed triple-digit earnings growth (examples referenced +205% EPS and +26% sales in recent quarters).
- Estimates and raised guidance supported the “TML-like” profile.
- The chart showed repeated constructive pullbacks and reversal-style bars around key moving averages.
Scanning and building a routine (so you’re not guessing)
A screener example that filters for:
- US stocks
- Price above 21, 50, and 200-day moving averages
- 50-day average dollar volume above $100M
- 20-day ADR% above a threshold (example used 2.25%, with the option to raise to 3%+)
From there, you can sort by:
- Highest liquidity (to find familiar, institution-grade names)
- Highest ADR% (to find the fastest momentum candidates)
TradingView resources include the my indicator and tools:
For practice and structured review, there’s also a spreadsheet resource:
If you want more context on the broader process behind planning and review, these are useful:
- https://www.youtube.com/embed/bxSHCJW06RA
- https://www.youtube.com/embed/D1xJFXvlqGw
- https://www.youtube.com/embed/Ah53zVCCAPU
Conclusion
The market gives plenty of setups, but it doesn’t give you the answer to “which one.” That part comes from a process: compare relative strength, match your stop to ADR%, check liquidity, and layer in earnings and sales when you’re in true market leader territory.
Keep your focus on leading groups, then find the leaders inside them. If you want to follow more of this work in real time, you can check out my trading community membership and the coaching sessions that go with it.