Today I will re-cover the 1st M of kaizen trading – Method of stock selection.
Are you the buy-and-hold long term investor or the get-in-get-out trader? Once you decide, you’ll automatically choose between fundamental analysis and technical analysis.
Today, most young investors are not investors but rather traders; their attention span is very short, computer skills plentiful and prefer to go by paint by numbers especially those accompanied with fanciful charts and its symbolism.
Remember, the stock market is like a river, you cannot push it but it certainly can push you to the brink of bankruptcy if you have not ready. Patience and persistence are hallmarks of great traders, though, I suspect luck is undeniably on the side of those who work hard with dedication and focus to continuously improve their trading skills.
The secret to successful trading is knowing your trading rules, keep score of your trades and have fun whilst at it, especially if you are making money! This secret applies to all learning process be in business, love or health.
This précis is on short-term trading to decide on your method to select stocks to buy, i.e. know your buying rules.
You could select either one or combine the following technical indicators.
1. Moving average chart – The moving average (MA) is a technical indicator that plots the average value of a stock price over set period, e.g. 30 days, 60 days etc. A good trading rule is to employ 30 days average against 200 days and when they intersect is a call to action.
2. Understand how to read stock charts and there are several commonly available as follows
a) Bar chart
b) Point and Figure chart
c) Candlestick chart – Japanese candlestick is simply the most preferred software for visual stunning grasping of trading actions. I have covered this topic before, though I never fail not to mention Steve Nison, author of “Beyond Japanese Candlesticks – New Japanese Charting Techniques”. Awesome book, don’t trade without reading this book. Enough said!
Basically having using the above charts ( 2 Moving averages, bar or candlestick charts) you have effectively created a triple-screen selection criteria. Once you use charts to decide which stocks to buy, you have finally begun your first step of a trading plan. Start documenting your trades and keep score. That is keep track how many times your stock picks actually rise in price after you buy and this statistics form the basis for your decision to continue to use or fine-tune your methodology of stock selection. This is essentially key to kaizen trading, i.e. continuously improving your rules towards profiting from stock trading.
It is good to perform Paper Trading, and since no money is involved, new traders can afford to make mistakes and learn from it.
Happy stock trading!