3 Steps To Profitable Stock Picking

Stock choosing is a very complicated process and investors have different approaches. Anyway, it is wise to follow common steps to minimize the danger of the investments. This article will plot these basic steps for choosing high performance stocks.

Step 1. Choose on the time frame and the general strategy of the investment. This step is very valuable because it will command the type of stocks you buy.

Assume you decide to be a long term investor, you would need to find stocks that have sustainable competitive advantages along with stable growth. The key for discovering these stocks is by looking at the historical fulfillment of each stock over the past decades and do an easier business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you think to be a short term investor, you need to adhere to one of the following strategies:

a. Momentum Trading. This tip is to look for stocks that amplify in both price and volume over the recent past. Most technical analyses help this trading strategy. My suggestion on this strategy is to look for stocks that have displayed stable and smooth rises in their prices. The conception is that when the stocks are not volatile, you can easily ride the up-trend until the trend breaks.

b. Contrarian Strategy. This method is to look for over-reactions in the stock market. Researches show that stock market is not always capable, which means prices do not always orderly represent the values of the stocks. When a company declared a bad news, people panic and price often drops below the stock's fair value. To choose whether a stock over-reacted to news, you should look at the potentiality of recovery from the impulse 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 credent that the market over-reacted. My tip on this strategy is to look a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks reflect candlestick reversal patterns, I will go through the recent news to review the causes of the recent price drops to determine the existence of over-sold chance.

Step 2. Conduct researches that give you a choice of stocks that is steady to your investment time frame and strategy. There are many stock screeners on the web that can assist you find stocks according to your needs.

Step 3. Once you have a list of stocks to buy, you will need to vary 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 scale of money you should allocate to each stock. This decision is crucial because diversification is one of the free-lunches in the investment world.

These three steps must get you started in your quest to continue making money in the stock market. They will deepen your knowledge about the financial markets, and would give a sense of confidence that helps you to make better trading decisions.