angel_8866
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 Posted:
Thu Oct 20, 2005 12:02 am Post subject:
3 Steps to Picking Winning Stocks |
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Stock picking is a very complicated process and investors have
different approaches. However, it is wise to follow the general steps
to minimize the risk of the investments. This article will outline the
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 becase it will dictate the
type of stocks you buy.
If 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.
If you decide to be a short term investor, you would like to adhere to
one of the following strategies:
a. 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 advise 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.
b. 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
wether 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 advise 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 gives 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. You can learn more about the
Markowitz analysis at: http://www.cisiova.com/blogs/optimalportfolio
If you take your time to follow through these three steps, you will
find your investment performance drastically improve.
About the Author: Zheng Fang is the creator of Advance Stock Pattern
Scanner of http://www.cisiova.com. He runs several blogs that posts
daily stock picks free of charge for the investment community. These
blogs are accessible at: http://www.cisiova.com/analysis.asp
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