The downfall of many hard-working traders and investors is the inability to find good stock picks. It is much easier to effectively manage a trade or investment if you are in the right stocks to start with. It is very easy to latch onto the wrong names and waste substantial time and money waiting and hoping for them to work.
The hunt for the next great stock pick is one of the most enjoyable aspects of the trading process. There is a 'eureka moment' when the pieces fall into place and you start to think "this could work." The more you dig into a name and the longer you watch it trade, the more optimistic you become that this will be a good vehicle for profits. You still need to manage the trade carefully, but it helps tremendously to have confidence that you are in a stock that has the right conditions to do well.
Your approach to stock picking will depend to a great extent on your trading and investing style. Many longer-term investors place great significance on holding stocks that they are familiar with. They own an iPhone or do searches on Google, so they feel confident owning those sorts of names, like Apple (AAPL) and Alphabet (GOOGL) , that they encounter on a daily basis.
This is often referred to as the Peter Lynch style -- invest in what you know. It can work extremely well, but it isn't as easy as it sounds -- and can be limiting. If you fall in love with the wrong popular name, it can be extremely costly. Many investors end up holding onto the same tired stocks for years and never really mine the riches the stock market offers.
At the other end of the spectrum are pure technical traders. They focus on attractive chart patterns and quite often will not know anything about a stock other than its symbol. Finding good chart patterns to trade requires looking at many charts. There are scanning programs that will help with the task. They will allow you to set various parameters such as moving averages, volume, relative strength, and so on that will narrow the list of trade candidates.
Pure technical trading sounds much easier than it really is. There are no magic formulas and even the best-looking chart can be a dud. Charts are not perfect indicators of future prices. Finding good charts and then trading them is often more an art than a science. There are billions of dollars invested in the market using purely mechanical systems. Computer programmers design extremely sophisticated algorithms to trade stocks based purely on technical patterns. They do it quite well, but the timeframes can be as short as seconds. There is a significant amount of money on Wall Street dedicated to this task, and trying to compete on this level is nearly impossible for the individual investor.
Most successful traders and investors tend to use a system that melds both technical patterns and fundamentals. They look for attractive chart setups and then study fundamentals to find news and valuation catalysts. The combination of strong chart patterns and good fundamentals is where the big money trades can usually be found.
The first step in finding great stock picks is to read widely and look for ideas. You will find mentions of many interesting stocks on RealMoney.com, SharkInvesting.com, and even on Twitter (TWTR) . However, that is just a starting point. It is up to you to dig into the stocks that are mentioned and to see if the chart works for you -- and determine your confidence in the fundamental story.
During the course of the trading day, I tend to develop new ideas in two ways. First, I read the news. A stock that posted a great earnings report will always deserve a little investigation. In some cases, it can be a good time to chase an entry, and in other cases, it can be a good name to put on a watch list for future consideration. Simply reading the news will provide a good starting point for a list of stocks to look into further.
The second way I look for stock picks during the day is to monitor price action. I want to look at the names that are making the biggest moves on increased volume. That is really all you need to know -- that something is going on there that is of interest. I will look at dozens of these stocks every day and maybe find one or two that I view as having further potential.
Understanding both the technical action and the fundamental reasons for movement will help you determine your entry points. In some cases, you may be willing to chase a stock that may appear to be technically extended, due to the power of the fundamental story, while in other cases, you may want to stand aside and wait for better entry points to develop, or for some catalyst to near.
To be a great trader or investor, you must constantly look for your next pick. One of the primary reasons that people fail at investing or trading is that they don't make an effort to find good stocks.
The most incredible thing about the stock market is that there are new opportunities on a daily basis. There is no reason that you have to stay with the old names that aren't working. You can have a fresh start at any time. All you need to do is start looking and studying.