Best Stock Trading: Many of my readers and commentators have asked me the best stocks to buy over the years for advice on which are the best stocks to buy, or the best stock trading system, and I guess at the end of the day we are all looking for the perfect stock to buy, along with the signal to tell us when to buy and when to sell. In my own trading I have always used the following system, which has never let me down - so here at last it is!
It is not perfect, but is very simple, and provided you follow all the steps, you will end up picking good solid stocks which should perform well.
You will need some good end of day data charting software and a good source of news and information. For US data (which is where I trade mainly in options and stocks) the main service I use is provided by my broker as they provide excellent coverage on all the latest financial news.
Best Stock Trading System: How to Choose
Before I explain all the various steps, I thought you might like to try a bit of fun by joining the fantasy trading game. It's all free and you can win cash prizes by trading stocks in real time - I love playing, but have yet to win anything, but it's a great way to learn ( I still play!!) - stock market games are free.
You start with 100,000 USD and trade stocks in real time, competing against other players. Other than the obvious prizes, you can also test strategies and see how they perform - it's great fun, free and an excellent way to learn, so please have a go - I hope you enjoy playing! Now down to the serious stuff!! The first step sounds obvious, but it is important and it is back to the issue of why you are buying in the first place, and in many ways, relates to your trading plan. Many people wonder whether as a currency trader I actually invest in the stocks markets myself, and the answer of course is that I do - I keep sufficient trading capital in my trading accounts, then transfer the profits and re-invest these in the stock markets for the longer term in both the UK and overseas. The stock markets still offer the best long term returns against most other forms of investment. So in order to explain the process, I will assume you are looking for the best stocks to buy for the longer term.
Best Stock Trading : How To Identify Good Stocks
I have shown the steps below in a table form, which I hope will make it more straightforward and easier to read, but as I said before, there is no best stock trading system, just the one that suits you and which works for you. This is mine which has been honed over many years. The steps are shown in chronological order, but you can of course take them out of sequence (as long as they are all done before you place your order with your online broker!). They are a mixture of technical and fundamental, as whilst I am essentially a technical trader, I believe it is impossible to trade longer term solely by chart reading. In the chart below, T is for a technical action and F for fundamental!
T/F Action Reason For Action
F Consider world economy and those countries where economy is expanding or contracting Look at possible requirements from these countries for raw materials, commodities etc i.e: China - steel - most of this is common sense but it is a good exercise and will make you think! - if you do subscribe to a news service, this helps a great deal in doing the groundwork. Also think about the major exports and imports to and from these countries. The mining sector has done very well in the last few years as raw materials are in high demand with the world economy continuing to expand. Try to think longer term and also niche, possible growth markets of the future (wind farm technology - green issues etc , and the contrary - nuclear!)
F Consider where the broad economy is at present (by country) - early recovery, full recovery, early recession, full recession. Some sectors and stocks perform better depending on the state of the broad country economy. Remember the markets lead the economy which lags behind, so in early recession you will find utility stocks do well as they provide a secure and guaranteed income stream in a recession (we will always need light and power). By the same token people always need to eat, so the same trends do apply as consumers can always cut back on luxuries, but not basics!
T Analyse the major indices and try to establish the future long term direction for the stock markets. In the UK it is the FTSE 100, and in the US the DOW 30 and S&P 500 By looking at the charts we are trying to establish a view on where the market is heading in the longer term. Look at the associated volume for signs of major selling or buying by the professional money. Identify possible support and resistance areas, and plot the charts with the 20, 50 and 200 day moving averages to highlight crossover points. Look for obvious candle patterns such as head and shoulders etc.
F Consider sectors in their broadest sense and in terms of your knowledge as a consumer, and from local/international news Think about national and international consumer and market issues from a sector viewpoint - ie manufacturing, mining, financial services, distribution, travel etc. Consider these markets from a consumer viewpoint - take sugar for example - do you buy more or less than you did five years ago - is it more likely or less likely that sugar will be replaced with a low calorie alternative in the future - so would a sugar refining business be a good long term investment - probably not! - this is how you have to start to think - you have a fund of market knowledge - just use it!
F Analyse the major commodity prices such as oil, gold etc Rising raw commodity prices are generally not good news for markets as these convert to higher prices for the consumer.
T Now look at your end of day data charts and start to identify possible stocks to buy, starting with each sector. In looking at each sector chart, we are looking for sectors which are doing two things
1. They are outperforming the underlying major index (you will need to overlay one on the other using the charting package - all provide this as an option )
2. They are in a long term uptrend.
If the above criteria are met, then this is a good sector to consider.
Check the sectors on a weekly basis for any significant changes in the short/medium term
T Identify the individual stocks which make up those sectors and filter them down This is easier said than done (as the constituents change on a regular basis, and there is no standard of sectors between countries). However, most good charting packages do provide this as a sort option. This will give you a list of several hundred stocks or shares by sector. Now cross reference these using the sort facility and filter to those that are constituents of the major indices. For new investors in the US, I would suggest sticking with stocks in the S&P 500, whilst in the UK those in the FTSE 350.
T Look at each stock chart individually, and add the underlying index, along with the 200 and 50 day simple moving averages, and volume. We are now looking at stocks in a sector which is performing well, and we now want to identify stocks in that sector that are outperforming the main index. In addition we are looking at the moving averages for signs of a continuing trend. It goes without saying but I will say it anyway - only buy stocks in an uptrend - if you want to lose all your capital, then please go ahead and try and buy in a downtrend - many professional traders have lost all their money trying to pick tops and bottoms - but if you think you know better than me, then please have a go!!!
Finally we look at the volume for any significant selling or buying by the professional money which might give us some further indicators or future price movement. This should produce a good solid list which we now need to filter further.
T Draw in support and resistance lines on the charts, along with trend channels We are looking for three things here as follows :
1. If a stock has broken through a resistance level, this now represents good support for higher prices.
2. We are looking for a good trend showing higher highs and higher lows. In particular look for prices 'bouncing' off the 50 day moving average as this is an excellent indicator of higher prices to follow.
3. Look for any gap up moves in the chart, particularly if these occurred as part of a breakout through a resistance area.
T Create a watch list Add the filtered list to your watch list of stocks to keep an eye on as prospects to buy
T Filter your watch list using a 2% change in the daily price Check your watch list daily and compare with those stocks that move 2% or more on a daily basis - for those that have, try to establish any abnormal reason for the move (ie takeover or merger, results etc) Those stocks that move 2% or more in a day, are active and therefore ones we should consider buying if they are within our watch list of stocks. Get into the habit of doing this every day and if you see any new stocks, add them to your watch list having repeated the above steps in each case.
T Check directors dealings on watch list For those stocks we are now actively considering, check the directors dealings for each one and note any abnormal volumes for buying and selling. All directors' dealings have to be published by law, so you should not read too much into them, but at times they can be a useful guide.
T Check the key announcement dates for the stock You need to establish the following key dates for those stocks now on your watch list :
1. Next dividend date
2. Dates for any earnings announcements
3. Any other major announcements - change in key personnel (board level) etc
When you buy your stock, you do not want to be opening a position when the stock has just gone ex-dividend, or the day before a major news announcement (unless you are sure the news will push prices higher). All this information is widely available and please check on each stock before you buy!
F Daily news Read between the lines of any daily news reports for any signs of problems with the management of the company, its products or services, or any likely bad news in the future. Some of this is common sense and you will need to keep an eye on world events for any issues which could affect your stocks in the future. You should never be short of an "informed view" in the day of the internet.
F PE ratios and accounts Personally I do not include this step in my decision making, as I believe the charts provide the basis for future price direction based on volume spread analysis and my chart reading skills. However please include this if you are new to the whole business as it is a good discipline, and will teach you how to read a balance sheet and profit and loss accounts (although a good Finance Director will always find a way to hide those figures which are best kept from view).
T Finally identify the stocks you are going to buy, by name and ticker Don't buy them all at once in a rush - the market will still be there today, tomorrow or next month. If you are buying a stock that you are slightly nervous about then buy a few as a start, and see how they perform. Rather than buy 200, start with 50 or a hundred (known as averaging up). If they go up over the next few days, then buy the remainder. Make sure you know the ticker symbol of the stocks you are buying as some brokers will require this as part of the order.
Work out the number of trades and trade size from your money management Good risk and money management are the keys to your success. Make sure you have calculated the correct trade sizes and number of trades based on your investment capital, along with risk per trade.
Buy your stocks Go ahead and place your orders with your broker online. At the same time as placing your order, you must also place your stop loss.
Log your trades Keep a written diary of your trades, including all the details of the trade, the position of the stop loss etc. This will help you in your future trading decisions.
Best Stock Trading: Suggested Stocks To Watch
Now in order to get you started I thought it might help if I publish some of the US stocks I currently have on my watch lists. These are all quoted on either the New York Stock Exchange (NYSE) or on the American Stock Exchange (AMEX) and I have included the ticker and sector so you should be able to find them very easily.
For long term buying I filter on the daily and weekly charts. So here they are, as of 18th January 2008. I will be updating this section regularly on a monthly basis with several new stocks I think worth watching - so please check back regularly and don't forget to have a go at the fantasy game - this will get you used to ticker symbols etc and in fact you should be able to find these stocks there.
One other thing that new traders always seem to be frightened of is when a price breaks out into new high ground - I have never understood this at all, as to me this suggests a stock that is taking off, rather than one going in the opposite direction! I would suggest that new traders are extremely careful trading in the current market conditions as the markets are particularly volatile at the moment.
AIQ Alliance Imaging Currently at $10 - good steady price increases supported by good volume. Wait for the price to break above $10.50 - $11.00 region, before considering buying with a sell target around $13. Stock is in the healthcare sector, medical laboratories.
CCC Calgon Carbon Corporation Having broken out above a 9.50 trading range, the stock is now trading at $14.50 - well worth buying even in today's difficult market conditions. Stock is in the Basic Material sector and is involved in synthetics. Look to sell around $17 - $18 dollars. Good volume and price has held up even in market falls.
CMS CMS Energy A favourite energy stock - generally solid but unexciting!! Steady rise over the last few years. Currently trading around $15.70 this is a long term buy and hold with a wide stop loss. Conciliated in 2007 between $16 and 18$, I am now waiting for the stock to break above $18.50 before buying into the up move with a sell target at around $24.
DUK Duke Energy Another electric utility - my favourites - steady and reliable - currently trading around $19.40 the stock has performed consistently over the last few years in a steady upwards trend. Had a stock split in 2007 when trading around $35 I expect the stock to reach these levels in the next few years again. Wait until the stock breaks through the $20.60 before buying into the move. Once through this is a long term buy and hold with wide stop loss - good dividends.
DAR Darling International A cheaper stock at $11.62. The company is in the Consumer Goods - cleaning products. The chart shows good volume supporting the uptrend and with a breakout above $10.50 the stock looks set to rise further into new high ground.
WARNING - Please remember to never trade these stocks without a stop in place - you only have yourself to blame if you trade without using proper risk and money management techniques!
Live Stock Price and News - Alliance Imaging
Live Stock Price and News - Calgon Carbon Corporation
Live Stock Price and News - CMS Energy
Live Stock Price and News - Duke Energy
Live Stock Price and News - Darling International Ltd
Now all you need is guidance on the software, hardware and an overview of which type of stock broker to choose. The above may seem like a lot of work, but once you get in the routine it will become second nature. Hopefully the above will help in guiding you towards your best stock trading system