Profitable Stock Picking: Steps to follow. Stock selection is a very complex process and investors have different approaches. However, it is wise to take common steps to minimize investment risk. This article outlines some of the key steps in selecting high-performance parts.
Step 1. Determine the time frame and general strategy of the investment. This step is very important because it specifies the type of stock you are buying. Suppose you decide to become a long-term investor, you will want to find stocks that have a sustainable competitive advantage with steady growth. The key to finding these parts is to make it a simple business of looking at the performance historical functionality of each component over the past few decades. (Strength-Weakness-Opportunity-Threat) Analysis of the Company. If you decide to become a short-term investor, you may want to follow one of the following strategies:
Momentum trading: The strategy is to look for stocks that are both higher in price and volume than in the recent past. Many technical analyzes support this trading strategy. My advice on this strategy is to look for stocks that have shown a steady and smooth increase in their price. The idea is that when the stock is not unstable, you can go from high to high until the tendency breaks.
Contradictory strategy: The strategy is to look for over-reaction in the stock market. Research shows that the stock market is not always efficient, which means that prices do not always accurately represent the value of stocks. When a company publishes bad news, people panic and the price often falls below the fair value of the stock. To determine if a stock has overreacted to a piece of news, you need to look at the potential for recovery from the effects of bad news. For example, if the stock falls by 20% after a company loses a legal lawsuit that does not permanently harm the brand and product of the business, you can be sure that the market has overreacted. My advice on this strategy is to find a list of stocks that have recently fallen in price, analyzing the reversal potential (via candle analysis). If the bulk candles show reversal patterns, I will go through the recent news to analyze the reasons for the recent price drop to determine the existence of over-sold opportunities.
Step 2. Conduct research that gives you a stock selection that fits your investment time frame and strategy. There are a number of stock openers on the web that can help you find the stock that best suits your needs.
Step 3. Once you get a stock list to buy, you need to diversify them in a way that gives you the biggest benefit/risk ratio. One way to do this is to conduct a Markovitz analysis for your portfolio. The analysis will give you the cash ratio to be allocated for each stock. This step is important because diversification is the free lunch in the investment world. Here are three steps you can take to begin the process of earning money in the stock market. They will deepen your knowledge of financial markets and give you the confidence to help you make better trading decisions.