How to Pick Stocks

How to pick stocks using an effective trading strategy

Which stocks you trade is going to depend on a number of issues, including your level of experience, how much capital you have available, and what style of trading you are doing. Whether you are trying to find the best stock for day trading, or you prefer other styles like swing trading, position trading or investing, your criteria for how to pick stocks should be written down as part of a trading plan (see Risk Management for more details on developing a plan). Your trading plan is dynamic, and, thus, will evolve as you continue to learn, develop skills and uncover your strengths and weaknesses.

Here are a few things to consider before you pick stocks:

How to pick stocks
  • Understand your level of risk and decide what is appropriate
  • No matter your personality type, develop a strategy for choosing stocks to invest in
  • Start by picking one stock and then analyze the results
  • Use trading charts to understand movement of stocks and the overall market
  • Finally, stick with your plan!

Choosing Stocks Based on Your Personality

Also, your personality type will play a part in the types of stock you trade. For example, if you are 23 years old, grew up on video games, have a fast mind and need to have a lot of action to stay focused, then short-term, scalping may be right for you. On the other hand, if you are 65 years old, like to think things through before making a decision then maybe swing trading low volatility stocks might be more appropriate. Whatever decision you make, be sure to think it through. You need to understand that stocks have different levels of volatility and velocity of price movement. By using tools such as Beta, Level I and Level II information, you should be able to see which is the hare and which is the tortoise.

Keep Risk Management in Mind When Picking Stocks

Determine what degree of risk you can live with and afford. Focus on creating a stock picking strategy that is designed to preserve capital and control risk. The most important objective should be to preserve capital. You need to make sure to “stay in the game!”

Learn how to pick stocks from the experts at Trading Academy

There is a whole spectrum of stocks to trade, each with different levels of volatility, price, and volume characteristics. Start out by minimizing risk. As your skills, experience and any successes increase, you can consider expanding risk associated with the stocks you pick to trade.

One of the worst mistakes new traders can make is to “just start trading” and “see how it goes.” You need to analyze and calculate, making informed and educated trading decisions. Just like starting or growing a business, a plan is essential.

Keep it Simple When You Choose Stocks to Invest In

Keep it simple! Whatever stock picking strategy you decide over the long term, start out by trading just one stock. Watch, study and learn that one stock. Each stock has its own personality and characteristics. You need to understand these “habits” to anticipate the ideal moves to make. Study the charts at numerous time frames - intraday, daily and weekly. Over time, begin to add one more stock, and then another, and so forth. While you’re trading one stock, it’s okay to study the behavior of a few other stocks and learn their behavior. Once you’ve moved further along the “learning curve,” begin to trade one of the other stocks you’ve been studying. You will already have an understanding of its behavior since you’ve been watching it.

Focus on stocks that align with your trading plan and allow for consistency!

Do not change your criteria during the trading day – only when market is closed. Stick with your plan. Changing a plan in the middle of trading will allow you to mentally “cheat” on your plan. This leads to a general breakdown of discipline.

Some real life examples are listed below:

Ways to Pick the Best Stocks for Day Trading

  • I will only trade 5 stocks – 1 at a time until comfortable
  • Price between $20 and $40
  • Average 30-day volume of between 1 and 2 million shares
  • Medium degree of volatility
  • No biotech stocks (high intraday volatility)
  • I will study my 5 stocks each night at multiple time frames
  • Perhaps following S&P Futures

Ways to Pick Stocks Swing Trading (2 days to 3 weeks)

  • I will pick 50 stocks to trade– 1 at a time until comfortable and I understand this may take a lot of research
  • Price above $25
  • Average 30-day volume greater than 500,000 shares a day
  • 25 for Long watch list
    • Strong fundamentally (increasing revenues and earnings, high relative strength, in leading sectors)
    • Above 200 moving average
    • Perhaps following S&P Futures
  • 25 for Short watch list
    • Weak fundamentally (declining revenues and earnings, low relative strength, in weak sectors)
    • Below 200 moving average
    • Perhaps following S&P Futures
  • Stochastics signal

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions.

The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Past results are not a guaranty of future performance.

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