Do you have a strategy for picking a winner? I didn’t until now.
Whether you are researching your own stock to set a Target price, or going off an analyst opinion, you should always have an expected target or gain in mind. Some investors are looking for that 8% to 10% gain per year, and some are looking for more than that or are maybe even satisfied with less.
Prior to working on this post, I had not defined my exact calculations but usually what I did was factor in commissions first, and then find out how much the stock has to go up to hit 10%, 20%, 30%. Then I try to figure out if these expectations are reasonable.
Has the stock ever been that high? How recently was it close to my target? Is the stock trending upwards?
What is my risk? This should be at or close to my Sell stop price and my sell stop price is based on a previous
bounce/inflection in the market.
Now I’m trying to refine my stock choosing strategy, it’s always just been in my head. Sometimes I would not go through all the checkpoints before buying a stock either because I didn’t have time or I was acting on impulse. Trading isn’t a game, you can have fun with it but it should be more systematic to be successful. In addtion, I like to use stock screening tools to help me.
Here is my first draft:
- Stock must have a reasonable expectation of a 20% gain within 6 months to a year. This isn’t being greedy. Bigger gains offset unexpected losses.
- Stocks with higher dividends are more favorable if the expected gain is lower. These are places where I may park my money until something better comes up.
- Stock must be trending upwards. It’s hard to win by buying a stock that is tumbling. It’s like catching a falling knife although there are times when you can catch them at the right time. I think this should be done only if the entire market is going down for the day or week or whatever, because we know that there might be some discounts to take advantage of.
- Finding a Sell stop should be easy by using a recent(within 6 months) price.
- Reward to Risk ratio should be 3 to 1. For every $100 that I may lose, I’m expecting to gain $300. For example, if a stock is priced at $100, and the expected target is $130, and sell stop is $90. That’s $30/$10 = 3
- Positve analyst opinion and price target is favorable.
- Stocks have to pass favorable screening from www.finviz.com and www.stockscores.com
- Average volume should be high enough for me to buy and sell easily.
- Abnormal volume during the day, this would be a major plus if I could not find out what all the buzz was about since it may indicate that only certain people know about a new upside. But if it’s due to something that all investors have been informed about, then it would be less valuable.
I’m sure I missed some key points here, please feel free to comment or email me with advice.