So, now we have a list of stocks that are outperforming, or at least in line with, the main stock market index, so we can start a shortlist which we will gradually reduce down to our shortlist of stocks with which to start playing the stock market game, or with real money. Now let’s start to refine our list so that we end up with a handful of stocks which meet our objectives.
The next stage is to look at the various sectors, chart by chart. I do this on a weekly basis. As with the stocks we are looking for sectors showing a strong steady upward trend. Look for breakouts from resistance areas and do not be afraid of sectors reaching new highs. Having identified sectors that are performing well, cross check this against your current shortlist and remove those which are not in sectors which are performing well. We now have a list of stocks which we know are outperforming the stock market index, and are also in strongly performing sectors which should reduce your initial list to a few hundred stocks for our virtual stock portfolio. Now if you are a novice trader, I would add a further stage here, which is to filter the list against those constituents of the main index. For more experienced traders the list can be filtered against the S & P 500 in the US, or the FSTE 350 in the UK.
We’re almost there! – from here we can now reduce the list still further to arrive at our watch list of stocks. We now go through each of the stocks on our shortlist and look at the chart from a technical point of view. At this stage I also add the 20 day, 50 day, and 200 day simple moving average. I use these three which I find provide a balanced view of short, medium and long term trends. There are several things we are looking for here. Firstly we are looking for an upwards trend where candlesticks are bouncing off the 50 day moving average as this provides a strong signal that the move will continue. In addition we are also looking for points where the 50 day and 200 day moving average have crossed over, as this may indicate a turning point in the trend. Secondly we are looking for breakouts and gap up’s where prices have broken through an area of resistance which now becomes support, and resistance to a move back down. Third we consider the candle patterns and look for obvious signs of short term weakness such as an upthrust or bearish engulfing candle. Finally we look at the volume on the chart, to identify any unusual volume ( either low or high) which could signal a false move or trap up, trap down move, by the market makers. If all the above is a little confusing, please follow the trading and investing link which will take you to my main site where all the above is explained in detail.
Now we should have a watch list of good quality stocks, which meet all the above criteria, and on a daily basis we check to see which of these stocks move up by 2% on the day. This will indicate stocks that are active and there may also be reasons that this has occurred – takeover, results announcement, merger news, new directors, market news etc. The 2% filter can be set up very simply in Sharescope and acts as an early warning system for stocks on our watch list that something is happening, so pay attention.
Having refined out list, we are now in a position to place our orders in the market, either for our stock market games, or with real money. However before we do there are several things we must check beforehand of which the most important is whether the company has any news which is likely to be released shortly. We do not want to buy a stock, only to find the following day that they are about to announce their results for the quarter or the year, nor do we want to buy the day after the stock has gone ex-dividend. Now there are plenty of sites where this information is freely available. For the US markets where I trade mostly, I use the following site which provides a broad range of earnings data, dates and key announcement dates. Finding ex-dividend dates can be difficult, so what I tend to do is once I have identified a stock or share to buy, I go the company web site and check in the investor section to find out the date of the next dividend. The last thing to check is for any unusual directors dealings in the particular stock. All dealings have to be declared by law, so they will be published. Be careful in using this information too rigidly as there are many reasons directors buy and sell their shares, not necessarily because they are aware of any news which could affect the company share price.
We are now in a position to place our orders, but before you do, you will need to know how many to buy in order to meet your risk and money management rules written in your trading plan, and remember, all your trades will have a stop loss in place to protect your trading capital. If you need help with this, please just follow the above link. And finally, don’t forget to keep a trading diary as part of your trading plan. This will help to improve your timing and also a record of why you entered a trade at a particular time – review this regularly it will help you to improve your timing and your rate of success. Remember also when choosing your stocks to buy, that you want to have a balanced portfolio which will spread risk, so pleas do not buy all the stocks or shares in one sector. Have a mix of stocks across various sectors. In this way if one sector suddenly reverses its direction, then you have spread your risk across several sectors. I never have more than 2 or 3 stocks in the same sector simply for this reason.
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