3 Steps To Profitable Stock Picking
- Author Zheng Fang
- Published October 27, 2005
- Word count 529
Stock picking is a very complicated process and investors have
different approaches. However, it is wise to follow general
steps to minimize the risk of the investments. This article
will outline these basic steps for picking high performance
stocks.
Step 1. Decide on the time frame and the general strategy of
the investment. This step is very important because it will
dictate the type of stocks you buy.
Suppose you decide to be a long term investor, you would want
to find stocks that have sustainable competitive advantages
along with stable growth. The key for finding these stocks is
by looking at the historical performance of each stock over the
past decades and do a simple business S.W.O.T.
(Strength-weakness-opportunity-threat) analysis on the company.
If you decide to be a short term investor, you would like to
adhere to one of the following strategies:
a. Momentum Trading. This strategy is to look for stocks that
increase in both price and volume over the recent past. Most
technical analyses support this trading strategy. My advice on
this strategy is to look for stocks that have demonstrated
stable and smooth rises in their prices. The idea is that when
the stocks are not volatile, you can simply ride the up-trend
until the trend breaks.
b. Contrarian Strategy. This strategy is to look for
over-reactions in the stock market. Researches show that stock
market is not always efficient, which means prices do not
always accurately represent the values of the stocks. When a
company announces a bad news, people panic and price often
drops below the stock's fair value. To decide whether a stock
over-reacted to a news, you should look at the possibility of
recovery from the impact of the bad news. For example, if the
stock drops 20% after the company loses a legal case that has
no permanent damage to the business's brand and product, you
can be confident that the market over-reacted. My advice on
this strategy is to find a list of stocks that have recent
drops in prices, analyze the potential for a reversal (through
candlestick analysis). If the stocks demonstrate candlestick
reversal patterns, I will go through the recent news to analyze
the causes of the recent price drops to determine the existence
of over-sold opportunities.
Step 2. Conduct researches that give you a selection of stocks
that is consistent to your investment time frame and strategy.
There are numerous stock screeners on the web that can help you
find stocks according to your needs.
Step 3. Once you have a list of stocks to buy, you would need
to diversify them in a way that gives the greatest reward/risk
ratio. One way to do this is conduct a Markowitz analysis for
your portfolio. The analysis will give you the proportions of
money you should allocate to each stock. This step is crucial
because diversification is one of the free-lunches in the
investment world.
These three steps should get you started in your quest to
consistently make money in the stock market. They will deepen
your knowledge about the financial markets, and would provide a
sense of confidence that helps you to make better trading
decisions.
Zheng Fang is the creator of Advance Stock
Pattern Scanner of http://www.cisiova.com and the owner of
several stock picking blogs: 1. Optimal Portfolios:
http://www.cisiova.com/blogs/optimalportfolio 2. Candlestick:
http://www.cisiova.com/blogs/Candlestick_Stock_Picks 3. Cup and
Handle: http://www.cisiova.com/blogs/Cup_and_Handle_Stock_Picks
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