How do you go about choosing which shares to trade?

Posted By Robert On Tuesday, January 14th, 2014 With 0 Comments

Investment funds and exchange traded funds are for passive investors who are happy with low returns. But those of us who are happy to take bigger risks for higher returns would want to invest directly in shares via a good brokerage. Someone who bought shares after the 2009/2010 crash would have made over 100%. Your mantra should be 1) Borrow Cheap 2) Buy Cheap 3) Rinse and Repeat. An investor who bought into next year’s technology (internet retail stocks such as Facebook, Amazon and Netflix, solar energy companies like Solar City, First Solar, Sun Power..etc) would have also made multiples of his investment. Most European banking shares have also recovered strongly. It always helps to buy great companies at good prices. On the other hand it is very difficult to put a value to a fun.

A screening site like Google Finance is decent for USA and international shares. Stock selection should be accomplished by the use of filters to find the stocks that you are going to trade.  I think there are always things to buy, even if at times you have to buy “negative equities” like SUK2 or other short trackers. You just may need to change the route to find them. I have several methods to find buys which work at different times. For example, I have a very simple filter in Sharescope (I only use gold) which in 2011/12 were throwing up plenty of ideas…  This filter now only shows about 3 possibilities, one I would not touch, one I hold and the other I am thinking about.

Currently I am finding most opportunities by randomly reading results and IMS etc between 7 and 8am. One day this will change and I will use another method, I don’t have fixed metrics or “rules” as such.

To me this is all about finding a method which suits your own personality. My breakthrough came when I internalised that price is only dictated by supply and demand, I always knew it, but I had not internalised it, so never used the knowledge fully. I also came to realise that the really big profits for me came from the multi-baggers and not the multi trades, hence I can have a longer time horizon than many.

I also like stocks that move and trend, and I have found that higher Beta stocks have that characteristic, so the stock must have a Beta greater than 1.5.  Liquidity is also important to be able to get in and out of positions easily, and I like stocks with a minimum average daily volume greater than 500,000 shares.

The way you select trades also depends on your trading style.  For instance, if you are a trend trader, any stock must be above the 50 day moving average. That is an absolute for all screens. In this case I want those with ideal set ups of between 0 and 2% above the 50 day moving average.

The use of objective stock screens can assist you in putting together quality portfolios. What makes a good company to hold? Think about the service that is being provided and what customer need is being met or the demand that is being satisfied:

– Is the technology disruptive?
– Is the product or service easy to use?
– Is pricing an issue?
– How easy is it to spread the word about the product or service offered?
– What infrastructure or operation is needed before profits start flowing?

As always, be sure not to overweight any asset group and always use a stop loss after buying the stock

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