Traders Don’t Care What Company They Are Trading
It doesn’t matter what the stock is or what the company does, traders trade to get in, get out and make money in the process.
Look through a number of companies searching for the right ones for every trade you make, and if during the course of that you have a personal issue with a company you can simply find another.
On the flip side, never fall in love with your picks. You will most likely be moving on to others after a few weeks anyway, so don’t get attached.
With that clear, the first step in the strategy is to pick the right stock candidates, the ones most likely to make us money.
In order to help us choose we need to apply some simple logic. Do we:
1. Trade in a stock which has been going up, or
2. Trade a stock which has been stagnant or going down
The obvious choice is the first one – a stock with an upward trend. It’s obvious because it makes no sense to back the losers, yet the vast majority of traders and investors do back losers.
The vast majority of traders study a company’s fundamental price indicators, see a stock is under-valued (as it would be having spent a few months headed downwards), then make a purchase for their clients, and perhaps themselves.
The good company fundamentals they rely on (such as low price/earnings ratios, great balance sheets and the like) are meaningless if the stock price is going nowhere or trending downwards.
They sell themselves and their clients on the idea that the company fundamentals are good (which they are), the price is low (which it is) and the stock will turnaround soon. Yes, it may well turn around soon, but how much lower does it need to go first?
Trading is tricky enough as it is, and in order to improve our chances of profiting we must minimize risk wherever we can. We do that by eliminating as many of the negative variables as possible, and negative price direction is the first of those.
In fact the upward price direction of any stock will form the backbone of the stock we pick, and is really the extent of our ‘technical analysis’. With all things being equal, there is no reason to suppose that the stock will not continue on its path.
There is nothing magical or mystical about the fact that a stock with an existing upward price direction/momentum will give us a great trading advantage.
Pick out a dozen or so stocks to get started with. Those dozen will initially get short-listed to three, then eventually down to one, so at this point we need only look at the ‘long term picture’ – the stock’s longer term price direction.
We need to keep this obvious and easy. Don’t care about what the company is, what it does, or how big it is. The three images you see above really contain all the information you need to pick your dozen.
All you need to see is a reasonably upward price direction over the last nine to twelve months.
You can do this by flicking through price charts on the internet. Most trading platforms have price charts available, and they are available freely in many places online too.
There’s also no need for you to do this online. You can use print media as all you are looking for is ‘long term picture’ charts.
The problem you will find is that there are so many stocks to choose from. Choosing your stock the ‘normal way’ by first choosing a company you like, then go searching for its chart to see if it matches our criteria, only to find it doesn’t, will take you a long time. You may need to see upwards of a hundred charts to get your twelve.
The trick if you can call it that, is to do it the other way round. Scan lots of charts and pick out the ones which match our initial criteria, ie. those having an upward trend. That’s all you need to do at this point. We can find out what the company is later.
I find the easiest and quickest way to mass research stock charts like this is to use the financial section of a newspaper or magazine with sheets of charts on them. This way you can look through them quickly.
Alternatively do an online search for a list of the ‘best performing stocks’ of the year (or the previous year if the current year has just started) and find those which have been rising steadily upwards. Avoid those which are the ‘best performing’ simply because they jumped significantly once or twice but otherwise were stagnant or even dropped.
Use twelve month charts if you can at this stage so as to get a feel for the longer term price history. Avoid limiting your field of view too much (like using only 3 month charts) as you may fail to see patterns which would alert you to reconsider whether the stock is a good choice or not.
The twelve month charts should give you a good enough picture of which ones to chose and which to avoid.
There are other ways to scan stock charts but whichever method you choose, the trick is to scan a lot of them and make a note of those which have been displaying reasonably consistent upward momentum at least over the last six months, in particular the last three months.
Remember we don’t care what the company is or what it does, at least not at this point.
There will always be plenty of potential winners to choose from, even in a down market. In fact companies still showing upward price movement in a down market will likely rebound better when the market heads back up, so don’t let any negative overall market sentiment deter you.
Also, don’t lose sight of the woods from the trees and get bogged down in indecision. If the past nine to twelve month chart looks reasonably solid then it would be a good choice to move forward with.
If you still need some direction and prefer to step cautiously, I would recommend (for those with a low risk tolerance) you look at the ‘basket stocks’ like the ‘QQQQ’ (NASDAQ: QQQQ). They are a tradable stocks, like any other, but in themselves are actually made up of up to 100 other stocks in the same industry. So no one single stock in them can have much effect on the overall price.
This keeps their price very stable, and because so many people trade with them they are very liquid, meaning they have high volume and popularity so it’s easy to get in and out.
On the flip side they move with the overall market like the large sluggish beasts that they are, and their swings are very stunted as a result. Much lower risk, but that means much lower returns.
Furthermore, if a bear market exists then these basket stocks will follow the trend downwards, unless their particular industry is not.
These basket stocks are good to trade with for those with larger working funds. Even when you are competing to buy or sell your large orders will be filled instantly.
This is just one of the tricks you’d learn in the ‘Ten Steps to Profitable Trading’ ebook from Best Trading Strategy.