The Stock market keeps going up and more and more people want to get in on the profits. We are reminded of the surge in the Chinese stock market followed by a crash just a few years ago. A taxi driver in Shanghai lamented, after the crash, that he had picked all lucky names and numbers in the market and felt cheated that his picks had failed! Unfortunately, many in the US market are taking an all-too-similar approach. Just because has stock has been going up does not mean that it will still increase in value instead of correct. Way too stock pick advice is just so much hype and frankly dangerous for the novice investor. Long term investors focus entirely on fundamental analysis of stocks and day traders focus primarily on sound technical analysis. In both cases discipline and rules result in trading profits.
Picking Stocks to Trade
In today’s electronic and internet age the best way to find stocks to trade is with stock screening tools. Here are a few to consider.
Stock Spotlight
Big Cap 20
IBD 50
Sector Leaders
Use these tools to find stocks with strong fundamentals such as sales, margins, and profits. And always use these tools to check out stocks about which you read in the financial news or about which you receive a tip. That is the first discipline that will lead to trading profits.
The Past Predicts the Future
Fundamentals are what determine the final stock price but along the way technical analysis is a better tool. Markets develop patterns. And those patterns are repetitive. Technical analysis indicators are based on statistical analysis of trading patterns.
Relative Strength Index (RSI) – this indicator measures a stock’s most recent performance in relation to its historical strength. The number and magnitude of recent and historical up and down closes in compared.
Moving Average – the moving average is also used in technical analysis it is used to find the average value of a security’s price over a set amount of time. Trends of financial assets are tracked using the moving average through smoothing out the price fluctuations of daily price data. There are different types of moving averages including the Simple Moving Average (SMA), the Exponential Moving Average (EMA), the Moving Average Crossover, and the Moving Average Convergence Divergence (MACD).
Candlestick Analysis – candlestick analysis uses candlestick charts that provide advantages over the bar charts. They are much more visually appealing and they clearly illustrate investor sentiment. This provides a much clearer depiction of what is actually occurring in the markets, than if you were to use bar charts.
These technical tools help the disciplined trader make sense of a Moving market. By recognizing the first part of a developing pattern the trader can profit by placing a trade the benefits as the second half of the pattern develops. But, it takes patience to make this work and traders need to avoid the twin demons of the market, greed and fear. Taking a disciplined approach in following trading rules is the best way to produce trading profits.
