3 Steps to Choose Profitable Stocks

3 Steps to Choose Profitable Stocks

Picking stocks is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize investment risk. This article will outline the basic steps for selecting high-performing stocks.

3 Steps to Choose Profitable Stocks

1. Determine the time frame and general investment strategy.

This step is very important because it will determine the type of stock you buy.

Suppose you decide to become a long-term investor, you'll want to look for stocks that have a sustainable competitive advantage with steady growth. The key to finding these stocks is to look at the historical performance of each stock over the past few decades and perform a simple business SWOT (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to become a short-term investor, you will want to follow one of the following strategies:

A. Momentum trading.

This strategy is to look for stocks that have experienced an increase in price and volume over the last few years. Most of the technical analysis supports this trading strategy. My advice about this strategy is to look for stocks that have shown steady, smooth price increases. The idea is that when a stock is not volatile, you can ride an uptrend until the trend breaks.

B. Contrarian Strategy.

This strategy is to look for an overreaction in the stock market. Research shows that the stock market is not always efficient, which means prices don't always accurately represent the value of a stock. When a company announces bad news, people panic and the price often drops below the fair value of the stock. To decide whether a stock is overreacting to a piece of news, you have to look at the possible recovery from the impact of the bad news. For example, if the stock fell in 20% after the company lost a legal case that did not have permanent damage to the business' brand and products, you can be sure that the market is overreacting. My advice for this strategy is to look for a list of stocks that have experienced a recent decline in price, analyze potential reversals (via candlestick analysis). If the stock exhibits a reversal candlestick pattern, I will read the latest news to analyze the causes of the recent decline in price to determine if there is an over-sold opportunity.

2. Doing Research

Research that gives you stock options that suit your time frame and investment strategy. There are many stock screeners on the web that can help you find the stock that fits your needs.

3. Diversify By Providing The Highest Return/Risk Ratio.

One way to do this is to do a Markowitz analysis of your portfolio. The analysis will give you the proportion of money you should allocate to each stock. This step is important because diversification is one of the free-lucks in the investment world.

These three steps will help you get started on your quest to consistently make money in the stock market. They will deepen your knowledge of the financial markets, and will give you the confidence that helps you make better trading decisions.