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Asset classes guide
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Three Steps To Stock-Picking Success
With thousands of stocks, mutual funds and exchange traded funds
to choose from, it may seem like a daunting task to
separate the wheat from the chaff.
Don't let the shear numbers discourage you.
By applying three simple steps, you'll quickly have a
small list of strong performing stocks... ready to work for you,
putting money in your pocket!
First... you need to identify which stock sectors are
performing better relative to the broad market.
This is called Relative Performance Analysis.
For example, you might compare Healthcare, Oil, Computer and
Retail sectors against the Standard and Poor's 500 Index.
Start by comparing the last three months of price
activity. This is a significant time period for
identifying emerging trends.
You'll want to select sectors and indices that are positioned
well above the broad market... those in a strong uptrend.
The higher the percentage reading, the better the index is
performing.
There are many Web sites to help you do this quickly and
efficiently. For instance, StockCharts.com has a section
called PerfCharts which already has predefined
comparisons ready to go.
Additionally, you can customize your analysis by entering
your own index, sector or stock symbols. Take the time to
familiarize yourself with this powerful stock analyzing
tool. You'll be using it often.
Second... take the strongest sector and compare it
against the component stocks that make up the sector.
For example, if the AMEX Morgan Stanley Healthcare Providers
Index (RXH) is performing well,
compare it against LifePoint
Hospitals (LPNT), Universal Health Services (UHS), Tenet
Healthcare (THC) and Triad Hospitals (TRI)... all component
stocks of the index.
Some component stocks will out-perform their index.
Others will not.
Take the strongest stocks (highest percentage) and add them to
your list.
If the PHLX Oil Service Sector (OSX) was another strong
performer, take the component stocks and compare them to the
index itself. Then, add the best stocks to your list.
A list of component stocks can be found at each exchange
that sponsors a sector or index. Some exchange Web sites
include: amex.com, phlx.com and cboe.com.
Third... once you have compiled a short list of stocks
you'll want to apply some simple technical indicators in
order to determine appropriate entry points and price target
objectives.
You might use Elliott Wave, Fibonacci or
candlestick analysis to help you make your decision.
Now, it's time to pull the trigger... make the trade and let the
profits run.
You'll find relative performance analysis a choice addition
to your investment toolbox.
Let it be your starting point and basis for all your trading
decisions.
Good trading!
About the author:
Russ Schmidt is the President of Stock-Charts-Made
-Easy.com, a Web site dedicated to showing how
conventional charting indicators and technical analysis can be
used to uncover stock price turning points. Discover trading
systems and methods which can be applied to stocks, futures,
mutual funds and Forex markets.
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