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A Criteria For Picking Profitable Stocks.

Posted by strudy on Aug 7th, 2008

I bet you are wondering what criteria I use to pick my potential money making shares? Ok I will list them for you very briefly.

1. Adhere to your written down plan for buying and selling shares. I.e. The amount you are going to spend.

Have a stop loss in place (This is the amount you can afford to lose if things go the wrong way. 2% of the total value of your portfolio is a good guideline)

The % profit you want to make after allowing for brokerage etc.

The time frame you would like. (Not always possible) for the total transaction. Is it short, medium or long term?

The number of shares you want. (This depends also on your capital constraints)

Diversify don’t invest just in one area. Spread your risk over different types of companies. So if resources go downwards and you have Banks and Retail in your portfolio the chances of all thee going downwards are very slim.

Unless of course there is a general market crash then every thing goes down. Thank God they are not too common.

2. When I pick a stock one criteria I like is the stock to have the last high in the share price has been higher that the one the day before. I do this for a minimum of three days to five days consecutively. Plus the same for the troughs, I like each trough to be higher than the one the previous day.

3. Plenty of liquidity meaning a good volume of shares has exchanged hands recently.

4. Buyers outnumber sellers. If the other way round, the share price will drop downwards for sure.

5. Recent news or rumours of news .i.e. Takeovers, profits etc. Only good news of course.

6. Directors buying shares {not selling} in the last 2 to 3 weeks.

7. The “Trend Lines” show a definite trend upwards. If in doubt don’t trade.

8. A visual look {the old “eye ball test”} at the most recent chart, preferably over the last month’s performance.

Again if in any doubt drop the share till next time; just add it to watch list.

I have around 30 to 40 companies currently on my watch list. I whittle them down to around 3 -4 using those basic criteria above.

It is not a hard a fast criteria, make up some of your own preferences. Mine is just to give you a very basic idea to help you get started.

When it all boils down to it, there are no guarantees we are just working on the “Probability” of the share price going upwards.

NB If it is only 50- 50 probability don’t bother this is a share going sideways and you might as well toss a coin because you are now gambling.

If a share is going downwards I use the probability of 70% of it continuing that way, 20 % chance of going sideways, 10% going upwards.

The next is probability I use for an “Upwards” moving share price is 70% to continue upwards and 30% probability of either going sideways or downwards.

Remember these are only guidelines; if things don’t go to plan that is when you implement a “stop loss” (see past article if you want to know more on this.)

This article turned out longer than I expected it to, but if it helps you to make more successful trades then it is all worthwhile. Just remember me when you make your first million.