Stock Picking Strategies

Stock Picking Strategies

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Stock Picking Strategies

Stock picking strategies are a very complicated method and investors have different methods of picking stocks. However, it is wise to follow the Stock picking strategies to minimize the risk of investments and gain the high returns. This topic explains you the basic steps to be followed for picking top performing stocks.

Step 1: The very first step is to decide on the time frame and strategy of the investment. You want to decide to for long time investment or short time investment. This step is very important because it determines the type of stocks you buy. The Stock picking strategies differ for a Long term investment and Short term Investment.

Suppose if you decide to invest for a long-term, you want to find the actions that have sustainable competitive advantages with steady growth. The key to pick these stocks is by looking at the historical performance of each stock in past decades and do a simple SWOT (Strength-Weakness-Opportunities-Threats) analysis on the company.

If you decide to invest for a short term, then you want to stick to one of the following short term investment strategies:

Momentum Trading: The strategy is to look for stocks that increase in price and volume in recent years. Most technical analysis supports this type of trading strategy. This type of trading strategy is to seek stocks that have shown a good stability and increases in their prices. The idea is that when stocks are not volatile, you just have to ride the up-trend until the trend breaks.

Contrarian Strategy: This type of trading strategy is to look for over-reactions in the stock market. Research shows that stock markets are not always efficient, which means that prices are not always adequately represent the values of stocks. When a company announces a bad news, people fear and prices regularly drops below the stock's fair value. In deciding whether a stock over-reacted to an event, you should look at the possibility of recovery of the impact of bad news. For example, if the value of the stock declines by 20% after the company lost a case in the court which has no permanent damage to the activity of the brand and the product, you can be sure that the market over- reacted. This type of trading strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If stocks show candlestick reversal patterns, it is recommended go through the recent news to analyze the causes of the recent fall in prices to determine the existence of over-sold opportunities.

Step 2: Conduct research that gives you a selection of stocks which is your investment duration and investment strategy. There are many stock screeners available on the Web that can help you pick stocks to suit your needs.

Step 3: Once you have generated a list of stocks to buy, you need to diversify your investment in a way that gives the highest reward and reduce risk factor. One way to achieve this is to conduct a Markowitz analysis for your portfolio. The analysis gives the proportions of money you must allocate to each stock. This step is crucial because diversification is one of the important factors of your profitable stock picking.

These three steps should get you started in your quest to always make money in the stock market. They will develop your knowledge of financial markets, and provide a sense of confidence that helps you make better decisions in picking the stocks.