3 Steps To Profitable Stock Picking

3 Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different tactics. However, it is wise to follow some general steps to minimize the risk of your 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.

Assume 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.

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If you choose to be a short-term investor, you would like to adhere to one of the following strategies:

  1. 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.
  2. 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 publicizes 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 drop to determine the existence of over-sold opportunities.

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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 that you want 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 help you get started in your quest to consistently making money in the stock market. These three steps will also deepen your knowledge about the financial markets. Remember always do your research, as this will provide you a sense of confidence that helps you to make better trading decisions and build your profile.

Originally posted 2019-09-19 23:09:58.


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