How To Trade on the Stock Market

Trading in the stock market takes great skill and awareness, once you've mastered the technique through Money management, Fundamental analysis, Technical analysis and Trader psychology you are technically able to invest. However how do we find these opportunities, is there a process for finding these stocks? how to we approach 1000 + stocks and filter down to a few? There are many methods that work you must find the best one that suits you. I use a top down appraoch as I will outline now.

LOOK AT THE ECONOMY

Look at how the economy is performing, certain stocks perform better during certain economic period. During a booming economy Financials, Industrials, technology preform better than the others. During periods of economic decline sectors such as utilities and pharmaceuticals perform better. You should concentrate on the sectors that perform the best and worst at each economic period. If we are in a bust period look to short from the financial, industrial and technology sector and long from utilities and pharmaceuticals. If we are in a period of economic growth look to long from the financial, industrial and tecnnology sector and short from utilities.

LOOK AT THE SECTORS

Once you determined which sectors to look for longs and shorts you must now take each sector and work out the weakest and strongest in each sector fundamentally, look at PE ratio debt, leverage etc (read books on Warren Buffet- he is the expert on picking value stocks), place all the stocks in order of strength so you have a league of stocks for each sector. Find the worst performing sector and look at the bottom of your table for the 10 worst companies, this will be you shortlist for your shorts. Find the best performing sector and find the 10 best companies, these will be your potential longs.

PERFORM FUNDAMENTAL ANALYSIS

Now look at the companies financial history, recent news, past earnings and find the 3 worst performing companies from the worst sector- ( I will show you how to perofrm detailed fundamental analysis in the later chapters). Now look at the at the best sectors and do the same to find the 3 best performing companies fundamentally. Remember to look at the price targets of analysts such as JPM, they have resources far superior to ours to value a company - remember to go with the big boys. Now what you should have is the 3 fundamentally worst companies from the bottom of the table of the worst performing sector, and 3 top performing companies from the top of the top performing sector table. These 6 will be your candidates.

PERFORM TECHNICAL ANALYSIS

Now look at the index's such as the DOW, Nasdaq, SPX. Use technical analysis as well as fundamental analysis to see where they are sbout to head. It may be you are predicting a down movement, if this is the case you will place 2 shorts and 1 long, the short will be on the 2 weakest out of the 3 companies and the 1 long will be on the best long out of the 3 companies. If we prediect the market will rise we do the opposite.

Using this approach enables us to find the best and worst stocks, using a ratio of longs and shorts depending on the market direction will allow us to hedge ourselves. Lets say we expect the market to rise but they in fact fall, we have 2 longs on strong companies - as they are strong they will not fall much, since we also have a short on a weak company this should fall significantly so we are hedging our losses. The same concept also applies to the opposite market direction

Please take the time to rate this article and leave a comment. Please read my next article on How to hedge your portfolio.

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