Trading in the stock market can be challenging if you do not have a clear roadmap and recipe for success. The purpose of this article is to provide some key structure in selecting your investments or trades. Follow this process and your chances for finding high-probability successful trades are likely to increase.
1. Industry Group
The most common mistake that investors make is looking at an individual stock without reviewing the industry group’s performance. It is key that investors start their due diligence by examining the performance and trend of the overall industry group. Savvy investors understand the importance of a “top-down” analysis approach and know that old saying “a rising tide lifts all boats”. So if you truly want to increase your chances for success in the stock market, start with the attraction or trend of the industry group before identifying any individual stock.
Industry or sector analysis is very similar to a real estate investor purchasing a property. The real estate investor first focuses on the surrounding neighbor because they know the importance of associated properties and how they will have an impact on the valuation of their identified property. Trading and investing in the stock market is very similar. If you develop the habit of checking the surrounding “neighbor”, understand the attraction or valuation of those related properties; you will increase your chances for successful investment selection.
2. Fundamentals
The 2nd thing you need to do BEFORE you think about pulling the trigger and placing that trade is to check under the hood, what is better known as the “fundamentals”. Many investors think they need a degree in finance, but even a simple look at the company’s basic fundamentals will give you a sense for the strength and viability of their business.
Key Fundamentals
Here are some key trends to note and compare to the company’s closest competitors.
- Revenue
- Net Income
- Profit Margin
- Return on Equity
3. Trends of Interest
Critically important is to look for trends of interest. This means starting with the “footprints of the elephants” and noting if the big investors are putting their money on the line with your stock of choice. While the investment from a big money manager is no guarantee that your stock is going to do well, it does increase the probability. Another trend to watch for is “insider buying”. There are many reasons that executives of a company sell their shares, but there is usually one main reason that they buy shares of their company – they believe it is undervalued.
It is also important to note global trends for the company’s supply and demand of their products and services. Successful investors and traders understand the importance of noting trends and classifying them as “cold, warm, hot, and explosive”. Yes, analyzing global trends does take time and a commitment to serious due diligence, but the payoff can be HUGE.
Finally, under “trends of interest”, an investor should focus on the leadership of the selected company. Determine if the executive team are seen as visionaries, great business leaders, or underperformers. If they have major followers, chances are great that the stock valuation has solid upside potential.
4. Analysts
Many investors dismiss analyst ratings but this is a mistake. After doing your above due diligence and your findings support a high-probability rocket ship stock, but then you notice that the consensus amongst the analysts is a “hold”…this could be the set-up for a future catalyst. How, you might ask? If everything else is equal and your findings support a good buy, and then later the analysts begin to revise their ratings from a “hold” to a “buy”, this typically serves as a catalyst to help catapult your stock’s valuation to new heights.
5. Earnings and Conference Calls
There is much that you can learn by listening to the company’s conference call. You will find out not only the company’s outlook and possible concerns, but you will also uncover what is important to the analysts. The questions being asked could signal a trend of what the analysts are seeking and provide insight to you as an investor of what is really important. Listen to how the executives handle the questions….are the questions handled with confidence? Are there other companies in that group that perhaps have a better foothold on the trend of interest to investors and analysts? Listening to the earnings call or reading the transcript is key in this process of becoming a successful investor or trader.
6. Technical Analysis
After all due diligence has been completed, one of the true barometers of the market’s interest in a stock is “Price Action”. The supply and demand of a company is ultimately reflected in the price. An investor or trader of the market must learn how to recognize KPPs (key pivot points) that reflect the emotional patterns of market participants. As you become more familiar with the price action, price patterns, support and resistance areas, and other technical aspects of chart reading, your ability to effectively manage your risk and identify low risk/high reward opportunities will increase.
Regardless of whether you are a short-term trader or long-term investor, to effectively recognize price patterns and distinguish between ‘major’ and ‘minor’ reflection points of supply and demand, it is important to use multiple time frame analysis. This means viewing a chart from not only a standard one-year time frame, but looking at all major time frames including a 20-year, 10-year, 5-year, and 3-months, and various intra-day charts.
Viewing a chart utilizing multiple time frames will ensure that you gain a better understanding of key pivot points and the major and minor waves of a chart. This helps you to make better decisions on both your entry and exits.
7. The Plan
One of your finals steps before placing the trade is to plan your entry, your exit, and the strategy you intend to utilize that will not only help increase your probability for success, but also eliminate as much of the risk as possible. Architecting a trade with the idea of reducing your exposure and providing the highest reward is the true sign of a Master Trader.
Follow the 7-steps outlined above and you should see a higher degree of success in the market and come closer to your pursuit of trading for a living.
About Bruce E. Dinger
Chief Trader Bruce E. Dinger, CEO and Chief Trader of TNT Trading the Stock Market, formed the The Naked Traders with the concept of teaching other independent traders how to "strip themselves of all emotion" when they trade or invest in the stock market.
Mr. Dinger has spoken on some of the largest stages around the globe, including CNBC, BusinessWeek, SuccessMagazine, The Women's Financial Conference, Rich Dad's, On-Line Trading Academy, Success Resources, and many others. He has one of the best reputations in the financial markets for helping students achieve their goal of becoming an independent trader or investor. Mr. Dinger can be reached at info@TheNakedTraders.com.
