Previously, I ran through the system I use to narrow down and find the stocks that I would consider trading. This is the most important action you can take to ensure your success, as some stocks are much easier or better to trade than others.
You may feel overwhelmed by all the choices that you have when looking for a stock or sector to trade. There is no one right choice, so you shouldn’t stress about it too much, you just need to find one that seems to be moving understandably, so that you can anticipate the direction and trade appropriately. That’s all that you need to make money! At any given time, there will be a variety of choices. Some people only ever trade a handful of stocks, and get to know them and their foibles very well.
One of the factors involved in trading is how quickly and how well you can get out of a stock that seems to be going in the wrong direction. This is where we get into the concept of liquidity. In general, for trading you want to choose a stock which is bought and sold freely and frequently, so that there is always a market for your trade. Some small companies trade so little that any rush of enthusiasm in their stock immedi-ately affects the price – you may not mind this if you are a value trader, but for normal short term trading, this is a disadvantage. Why? Because you may find that you are unable to sell your position before the price has changed a lot, if the price is going the wrong way. You shouldn’t be putting any of these stocks in your initial selection.
You could do worse than look at the FTSE 100 stocks, and that is where I suggest you begin your search. Even if you not in the UK, you may find it easier than trading in your local market. The stocks included are reasonably well traded, giving no liquidity problems, and they are controlled in their movements – if you’ve followed the markets for long, you will have noticed that the US stocks are a lot more volatile, and move more quickly, and that doesn’t help when you are learning how to trade, although you may hope to exploit it once you know what you are doing.
Your first collection of possible stocks to trade is drawn from the FTSE 100, as I said. You can focus on a particular sector, and get to know how those stocks react, so you aim to trade the principal companies in it; or you may want to narrow down your choices by looking for stocks that have indicators showing they are overbought or oversold. You could narrow down to stocks with RSIs above 65% or below 35%, for in-stance. Your initial scan should include eyeballing the charts, and trying to see which appeared to be trending, and which are just dithering around.
For your second stage of selection, you need to make some choices. It’s a good idea to get to know just a small range of stocks. These are the ones that you will draw on the charts, looking for the support and resistance lines, examining the range that the RSI normally follows, etc. When the factors all point to some action, you put the stocks into your third, or trading file, and, after checking for supporting factors, make your trades.