Before making any buys on the stocks market I’ll go over my buying criteria to make sure it matches my strategy. I’ve set up an overview of the things I want to consider before any trade. They’re divided in the well known categories;
the overall market, fundamental company analysis and technical chart analysis.
I’ll go over all of my buying criteria in short here and will go deeper in most of them in future posts to help you understand my strategy better and improve your own trading as well.
The majority of the stocks tend to follow the overall market trend. However you can choose to be a contrarian investor and go against the grain, which some investors have mastered very well. Although the majority of the biggest and best investors and traders are trend followers in their own way. And why make it harder for yourself than necessary? Three out of four stocks will follow the overall market trend. Meaning that when the overall market is in an uptrend about 75% of the stocks are likely to have some good gains as well.
I look at the overall markets every day to keep myself in line with them and to be prepared for any opportunity that comes on my path. In short there are three possible trends in the market that for me all have their own approach;
- Uptrend > Simply the time when you can make the best buys on the market. Most of your profit will come from going long in the best stocks during bull markets. If you know how to use it you may be trading on margin in a confirmed uptrend.
- Sideways > The trend where the market is about to turnover from the up- into a downtrend or the other way around. Or it could be just a correction period in the market. Be conservatively in buying new stocks during a sideways market trend as you may not know which way the market is going. Take some of your profits on your current positions. And if you use margin now is the time to get out of it. be prepared for a market change, whether it is coming or not.
- Downtrend > When the market is starting a downtrend it is time to sell your positions and take your profit. Don’t risk holding on to your stocks to long and lose your capital. You’re going to need it to start buying when the trend starts changing again.
When you search for a stock that is going to make you a nice profit you want it to gain a lot in price. In order to do this the underlying company needs to be strong enough to support the price growth. Therefor I’ve found a set of criteria that I look for in companies that are going to make it on my watch list and possibly in my portfolio.
I focus on companies that are generating strong earnings and where the earnings are still growing. The reason for that is that when the earnings are strong and still growing it means that the product or service the company is selling is gaining in market interest. Most of the time this is because the company has released a new and innovative product or service on the market. More and more people or businesses are interested in buying it as they start to see the benefits of it. By strong and growing earnings the company will become more valuable over time and thus it’s stock price will gain.
The criteria I look for are:
- EPS growth at least 25% in recent quarters
- Accelerating earnings growth in recent quarters
- Annual EPS growth at least 25% in the last 3 years
- Sales growth at least 20% in most recent quarter
- Return on Equity of at least 17%
- New product, service of management
- In the top stocks of its industry group
- Supported by buying of institutional investors.
All stocks on the market are being watched by lots of traders, both professional and individual. Everybody has their own strategy and set of rules for buying and selling. The execution of all these strategies forms patterns on stock charts. That’s why you can’t ignore the technical analysis of a chart when looking to make a trade.
I look for stocks breaking out of a solid formed base pattern. Mostly a cup-and-handle pattern. A solid formed base forms the foundation for a stock to build it’s substantial gains on. During the forming of the base traders are taking positions in the stock. The handle is a small correction of traders getting out of the stock. Often they bought it before it fell into it’s correction. They held onto it through the cup and are now back around break-even and ready to sell.
- Breaking out of a solid formed base
- Average daily trading volume of at least 400,000
- Trading volume increase at least 50% above average when breaking out
- Buy within 5% of ideal pivot point
- Wait for a breakout dip and support test of pivot point if missing the initial entry point