To pick winning stock in the stock market is a very complicated process and investors have many different approaches and strategies like using what is called technical analysis or TA. TA involves dozens of signals or behaviours by the stock that involve trading volume, price movement, moving average,closing and opening price and many more.
You can do stock market prediction or stock prediction using these TA tools. Stock market investment is lucrative only if you can see what is next coming up for the stocks using the TA. Couple with that analysis, you must have your own stock management planning and stick to it.
3 basic Steps To Profitable Stock Picking
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 and do some TA on the chart pattern.
If you decide to be a short term investor, you would like to adhere to one of the following strategies:
– 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.
– 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.
Penny Stocks Turn Your Pennies Into Dollars
Penny stocks are normally those with just a couple of cents per share. We’ve all heard about the investor how bragged about his 100% or 1000% return on a stock or about the guy who made it rich by investing in small caps, undiscovered stocks that made it big.
In theory, it seems to be too easy. Invest in a couple of penny stocks, then sell them when they move up. Unfortunately, it is too easy. Too easy to lose money unless you know what to look for.
First, lets have a look at what types of companies trade on the OTC BB or Pink Sheets.
Stocks that no longer trade over $1 on the Nasdaq
These include companies that fell from grace (Enron). While it is possible that they may see better days in the future, the odds are stacked against them. Its usually best to avoid trading these stocks. If you feel that the temptation is too much, wait until the stock begins to rebound. If you try catching a falling knife, you will get hurt.
New Start Ups
Every year there are hundreds if not thousands of companies who decided to go public. Whether they need the money to expand their business, or are looking to cash out their equity, its a natural progression for a company with a compelling story, and a great track record to go public. While many of these companies will file for an IPO, many others will start off trading on the OTC BB as a penny stock
Second, lets look at some tips to help the penny stock trader avoid making costly mistakes.
Stocks listed on the Pink Sheets don’t have to file annual or quarterly statements. This makes starting your due diligence difficult. Often, the information is sketchy at best, and typically, its biased. You should expect a shareholder to say good things about the company. If the company didn’t have potential, they wouldn’t be holding it. Or, they might be hoping to unload their shares and hope to talk you into buying.
Stocks listed on the OTC BB file annual and quarterly statements. This provides some measure of financial success. You’ll find most penny stocks lose money, whether through managerial incompetence, or research and development. The key is to identify the companies whose management has a record of consistently making money, or at the very least, delivering on their business plan, and decreasing expenses.
Penny Stock Newsletters
Here’s what I can tell you: be careful! Check the disclaimer for the amount the newsletter is being paid to carry the profile. Are they being paid in cash or in shares?
You’ll likely find a corelation between the number of shares they are being paid, and the rating on the hype meter. Does that mean that you should avoid any stock where the company is paying IR professionals in shares?
No. Just keep in mind that they are selling a story, and if they sell the story to other shareholders, they will gain. This is not a problem if you get in early, but could be a problem if you aren’t able to jump in right away.
Take a look at the track record of the newsletter. Have they profiled winners? Do they state the facts, or state the hype?
Do they also offer unpaid stock profiles? If they do, you’ll likely find that they do their own research in all companies, and are looking to ensure that they aren’t passing a weak stock your way just to pay the bills.
If a company is paying an IR professional money to profile a stock to its subscribers, should you avoid it? Of course not. Think of the payment as advertising. They are promoting the company, and trying to get exposure.
Like any company, the only way to get exposure is through some method of advertising. So dont dismiss a paid profile as hype. Keep it in the back of your mind while you are reading the profile, but pay attention to the profile. You may find a diamond in the rough that no one has discovered.
If you want to make money, you have to be able to buy and sell enough shares to lock in your profit, or protect your capital. If ABC company’s daily volume is only 500 shares a day, it may take you several days to accumulate a position worth taking.
If there is bad news, who is going to buy your shares? If the volume is low, stay away. Its not worth it. If you feel that strongly about owning the company, consider contacting the company directly and working out a deal.
Buy Results, Not the Story
If you buy the hype, odds are, you will end up being the last one to own the shares, while everyone else has sold off their position.
Look at a company, take a look at what their business plan was, and confirm if they have followed through on that plan. Were they successful? Did they bring a product to market on time?
Did the company follow through on its acquisition strategy in the manner they set out? The hype might get you a quick pop, however, unless you are watching your trading screen every second of the trading day, you will miss out.
There are thousands upon thousands of penny stocks. The size of your position should not be anymore than $2000 – $3000. While this may not seem like much, keep in mind that its not unusual for a $0.10 company to drop to $0.05.
That’s a 50% loss. If your position is $10 000, a 50% haircut leaves you with only $5000. Keep your losses to a minimum. If the company has done well, and you are up, either take your profits off the table, or add to your position, and be sure to reset your stop loss so as to protect your previous profits. Capital preservation is the key to successful trading.
Have a plan before you buy. What are your reasons for buying. What is your exit strategy? Where is your stop loss? At what point will you take your profit? Write down these answers before you place that buy order.
Penny stock investing can be profitable. Remember, you are taking larger risks than you would if you were purchasing shares in a bank stock. That risk can be rewarded with returns that you cant get with a bank stock, or, it will be met with a large loss and a bad taste in your mouth for investing in penny stocks.
My Winning stock market investment Strategies
(Disclaimer: Apply only to me with my own TA )
I use many indicators to compare, project prices, trending and so on. Not all indicators can give you a 100% winning trades. You may ask why. The market is so huge and you can’t predict anything at all.
My first guide is following current news in the market. That is the very reason why you can see TV monitors hanging on the wall of the trading rooms. It can be war news, trade dispute, companies’ mergers and takeovers, election and so on. This really helps to start the day with the etrade.
Second inline of the guides is to find out what a stock is or are related to the news. The stock will have either direct or indirect impact on the news almost immediately.
Third guide is to drill down on individual stock fundamental. These include the market capital, revenues, stake holders, yearly performance, liquidity, financial ratio and so on.
Fourth strategy is to do some technical analysis using a chart that has many capabilities of tools to use to give you some winning edges.
Be aware that since the chart pattern and indicators are all useful to be used and if you overdo with them by using so many of the indicators your days will be as confused as a fools trade. Strategic for me is to use the indicator for the volume. If the volume in more that the previous day I can almost guarantee that the stock price will go up.
By how much it will go up is another headache. Normally I refer to the history pattern the candle stick pattern. If the pattern gives me more that 8% per day, than I buy at the opening price or at rebound range.
For day trade or contra , the stock must be highly fluctuate from high to low or low to high for any days. Sell the stock when the trend is aggressively going up. For a long term trade, just monitor it until it reaches your target price set by you.
Below is the widget i normally use available at tradingview.com