How to Choose Stocks to Trade

Technical analysis is one method of choosing stocks to trade.
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Choosing the best stocks to trade depends to a great degree on your personal investment strategies. Particular stocks lend themselves best to different strategies and investors, so the first step is to know yourself. After selecting a strategy, you can use a number of methods to choose the most profitable stocks to trade.

Step 1

Look for stocks with long track records of value growth and dividend payouts to hold for the long-term if you are seeking long-term gains. Investors with longer time horizons can take advantage of stocks that feature lower yields and lower risk. Holding stocks of “cash cows” -- large, established companies with records of success — can bring in sizable profits years down the road.

Step 2

Watch the IPO market for profitable opportunities. Newly-incorporated companies may offer their first round of stock to investors at a price well below earnings per share. This creates an opportunity for early investors to jump in and watch the value of their holdings hit the roof as the company expands and becomes more successful.

Step 3

Read analysts' reports on industries and companies. Industry analysts' jobs consist of monitoring specific industries for high- and low-performing stocks. Do not rely on analysts' opinions as end-all-be-all trading strategies; rather, use their advice as a starting point for conducting your own research into companies' financial statements, business models and price trends.

Step 4

Monitor a range of high-performing stocks to spot technical trends. Analyze stock charts and key financial ratios of stocks that you've spotted through the news or analysts reports, and become familiar with the wide range of technical indicators that throw buy or sell signals to experienced investors. One popular indicator, for example, is the twenty day moving average. Stocks below their 20-day moving average are likely to rise in value to meet the trend, and the same holds true for prices over the average.

Step 5

Use crises to your advantage from time to time. Established companies' stock prices may plummet as a result of a crisis or other financially damaging event. If the company has a solid plan to get back on its feet, a crisis-induced low point can provide an opportunity for large value growth as the price climbs closer to its previous level.

Step 6

Pay attention to the fundamentals. Watch and read business news to spot new companies with solid business models, truly innovative and valuable products and experienced management. Analyzing a company's fundamental strength and profit potential can help you to make predictions that technical indicators and analysts may miss.

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