Today I'm pleased to introduce The Wild Investor from...The Wild Investor.com! I've had the chance over the past few weeks to spend some time at his site, seeing his methods, and really gleaning a lot of good info. His post today covers something we can ALL benefit from. Enjoy.
A couple years back, I got my first break into the world of trading stocks by listening to Jim Cramer of Mad Money. My first couple of trades came through his recommendations; however, that seemed to die out pretty quickly. He covers so many stocks at one time, that it seems he is proven wrong more often than right. If I was ever going to make some real money in the markets, I would have to branch out on my own.
Tons of people know how to buy, sell, see if a stock is worth acting on, and so on, but very few actually know how to find stocks.
Let me clarify. Perhaps some article talked about the 10 stocks you have to buy in 2008. Many can probably pick and choose the best ones out of those 10, but without that article they probably could have never come up with a list of 10 stocks.
So how do you go about finding stocks to invest in? You can't always rely on some third party.
Many people enjoy the ease of scans, but the tools and resources may not be available to everybody or they may just not understand enough to perform one.
Below are some steps that can help you create your own manual scan and perhaps help you run an automatic scan sometime in the future.
Create a list of the past stocks you have either traded, watched, followed, or whatever. Try to get at least 50 stocks (100 if you are an overachiever). One by one, see which ones were successful, which failed, why they moved the way they did, and how you gained interest in that stock.
Try to group the stocks in the different ways your broke them down. For example, perhaps you have a few stocks that were successful on a cross of the 200 day moving average. Maybe some were oversold. Whatever it may be, just try and group some stocks together.
3. Classify Each Group
Out of the different categories you have created, come up with some sort of criteria that fits each stock in the group. For instance, say I have Stock A and Stock B in one group. Go back before those stocks experienced their gain and create some sort of pattern that could have been used to predict those gains.
4. Trial and Error
After you have gone through all your different groups, it is time to test. The more test you run, the better chance you have of creating a profitable search. Run your test on all the different stocks on your list, and see what results you get. Choose other random stocks that might match your criteria. Tweak it if you need to because the goal is to try and perfect your criteria, so that it should work more often than not.
5. Practice Run
Most likely you want to see if your system works before you throw real money at it, so find some stocks that fit your criteria. Use your finance site of choice and find top movers, similar stocks to the ones that were already successful, or look in the sector you are comfortable in and just let your system run. Follow the stocks until your system said it should have worked and look at the results.
Did it work? Keep trying and editing until you are comfortable throwing real money at it. It may seem tedious and cumbersome, but hopefully you will be able to move out of the realm of Jim Cramer and into your own world.
For those that still may be confused, here is a simplified version of my criteria:
Consistency to perform within 6 months or less
Ability to diversify and maintain some form of global exposure
Companies that have been oversold or beaten down
Buy and sell signals according to technical analysis
Best of breeds that continually produce and post solid numbers
Capability to shine in any type of market condition (recession proof)
In the end, the goal is to create a simplified way to complete a somewhat complicated task. If you can ease your tasks and rest your mind, then it only betters your trading, which increases your profits.