Things You Should Know about Stock Picks

Getting into the stock market, The first question will be; “What stocks to trade?” We try to look for any stocks that have high chances to put our capital in growth. Some want super growth, some seek stability and some seek for lower risk stocks. My point is, everybody has their own preferences, risk tolerances and investment horizon.

Stock picks from any sources are going to help cut our screening process. As long as we treat this as the first step in our investment strategy, not the final one. We need to do our own analysis before jumping into the ship. Some might forget. Some might have not much clue on how to analyze. However, professional traders/investors will always do their homework; trading/investing plan.

I listed below few key steps after obtaining stock picks from any sources:

1. Know your style

This means you have known few key things on your investment thesis:

· Time horizon, be it a day, a week, a month, a year or multi-years basis. This will determine what kind of analysis tools to be used and to be reviewed in screening the right stock picks.

During its raise in 2020, Tesla (TSLA) corrected few times for more than 45%. For a swing trader, 45% loss might be too deep. However, for a multi year investor, this correction might be tolerated as the purchase price was lower compared to the currently corrected price and far from the target price.

· Risk tolerance, some stocks have high volatility while others will move up/down in a small range of intraday price. Matching your risk tolerance and the stock price volatility is a must. You would not want to pick a stock that goes beyond your stop loss only to see that it reverses after touching your stop loss.

I am a swing trader, usually holding a stock ranging from days to weeks, with 15%-20% profit target and 10% stop loss target. In the example above (TSLA), I will not follow through the whole uptrend. Instead, there will be multiple trades as long as it fits my trading style.

Gamestop (GME) boom and bust in January might raise a new “rich guy in town”, but will also put many into a sleepless night. The intraday volatility was extremely high, ranging from -20% to +100%. I traded this stock when it was still in its “normal” zone (December 2020) and booked a notable profit. However, when I traded it back in the end of February, when prices consolidated, I hit my stop loss multiple times. The answer is simple: GME did not fit my risk management system for now (10% stop loss), thus, no matter how attractive the profit is, I might not be able to gain from this stock for now.

2. Analyze the recommended stocks

Once we know the most convenient way for us to trade, we can now get into the screening process; choosing stocks to trade. There are many sites that provide stock picks and ideas. Below I listed some that I usually read for insights (besides my own screener):

· CNBC (Pre market and post market mover)

· Investing.com

· Seekingalpha

· Zerohedge

· Marketwatch

· eToro news feed

· TraderTV

· Tradingview Ideas

This is where I will put an emphasize on this article: know thy stocks, know thy authors.

Once we know our trading style, we have to find the stocks that suit our style. This is sometimes forgotten by many traders (including me on my GME trades). Just because the stock is promising for others, doesn’t mean it will be a fit for you.

In Seeking Alpha, there are many different ideas based on the style that you can pick, ranging from the long ideas, IPO analysist, quick picks, etc.

Some authors provide stock picks for daytrading (TraderTV), some for the swing ideas (Seeking Alpha) and some are for long term investing.

Knowing your own style is important. Knowing the authors’ style in their trade ideas is also a key to pick the right stock.

3. Plan your trade

You know your trading style now. You have some stock ideas. Now, it’s time to go to the most important part of stock investing; planning.

This ranges from:

· Stock by stock analysis using the right tools based on your style. (I use EMA 20, EMA50, MACD, RSI and Volume analysis for my swing trade).

· Your top list of stock picks

· Entry position, where is the sweet spot for you to trade this stock.

to:

· Stop loss position. This is where your risk tolerance will be. Stop loss is like a life vest when the tide is going against you. Treat stop loss like giving up bad things for a greater good. Do not tolerate, do not agonize, when the stock hits your stop loss, go out of the trade, re-analyze once you’re out of the trade and move on.

· Target price and profit taking strategy. Once the stock hits your target price, what is your plan? Take the whole profit? Half of the profit? Let the profit run? You should plan this far before the price hits your target. In my trade, once the trade hits my target (15–20% upside), I take half of my position out, raise my trailing stop to my buying price and let the profit run. Once it hits another milestones, I take another portion out, and so on until I say “this is enough for me” and take out all the remaining portion.

4. Prepare your mentality

Your trading plan is finalized. During the time, the stocks might up and down beyond your mental capability. It might trigger you to exit earlier than your plan. That is not a bad thing, if the tide is changing. However, most of the time, it is hard to endure the volatility during the trade. This come to the next step of “Preparing your mentality”. Imagine the stocks go out of your plan, nearly step in your stop loss region, or opening gap up/down against your trade, going beyond your stop loss, what will you do?

I usually put a soft stop instead of hard stop for certain stocks since the volatility might need me to adjust my trading plan. I also imagine the worst scenarios and if I can endure it, I trade it. If not, I’ll stay out of the game (no, not GME).

5. Execute the trade

Finally, execute the trade and look for the best. Wish you a good luck in your investing journey.