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Steps to analyzing an opportunity PDF Print E-mail

stepsSteps to analyzing an opportunity

Irregardless of where you found the stock you are about to analyze, the steps should always be the same.

1) Is the company fundamentally sound? (don't forget to compare your company with it's primary competitors)

Apply fundamental checklist. The fundamental checklist will represent whether the company is solid or not.

If yes, proceed to step 2

2) Is this a good time to buy/sell this company?

Apply technical checklist. The technical checklist will represent whether it is a good time to buy/sell the company or not.

If yes, proceed to action.

Notices or assumptions:

  • It will be assumed that every trading has a different philosophy when it comes to trading risk and experience. (Trading risk as in length/cost/amount of trade and experience as in related history to help decide stocks as well as trading experience.) This is why what works for one person may not work for another.
  • It is suggested to new traders to paper trade until they can answer the questions of why to buy or sell. Paper trading can develop confidence as well as remove emotion from the decision making process. It also helps ensure that the investor is doing proper research into their investment.
  • When looking at a potential stock for investment a checklist is important. These checklists ensure that you have done your due diligence in your decision. An investor should have two checklists, one for fundamentals and one for technical analysis.

Sample Technical Analysis Checklist

Example Technical Stock Check List
Stock: BUY/SELL Rating: insert total point score Date:
date of checklist
Confirming:
total posistive points 		Negating:
total negative points
Trending Indicators (indicators based on trend)
Example: Trend indicator 1
[href="/?p=Technical-Analysis.Chart-Basics&t=Trendlines"]Trendlines[/HREF]		 Example: uptrending +1 Example: downtrending -1

Trend indicator 2

(insert indicators as needed)

Trend indicator 3

(insert indicators as needed)

It is advised to at a minimum include trendlines. Trendlines are also important with other indicators to show convergences and divergences. Also when trading a stock that is trending these are very useful type of indicators while they are less effective in range bound situations.
Patterns (chart patterns)
Example: Candlestick patterns +1 for strong pattern,
+0.5 for weak pattern		 -1 for strong pattern,
-0.5 for weak pattern
Example: Chart patterns +1 for strong pattern,
+0.5 for weak pattern		 -1 for strong pattern,
-0.5 for weak pattern
Volume Indicators (indicators based on volume)
Example: [href="/?p=Technical-Analysis.Indicators-Oscillators&t=Volume"]Volume[/HREF] (Dow) Example: +1 for positive trend Example: -1 for negative trend

Volume indicator 2

(insert indicators as needed)

Volume indicator 3

(insert indicators as needed)

It is advised to at a minimum include volume, other volume indicators such as OBV and PVT  can be included as well based on the needs of the trader.
Overbought/Oversold indicators
Example: Stochastics

Indicator 2

(insert indicators as needed)

Indicator 3

(insert indicators as needed)

When trading a range bound stock these types of indicators are very useful, these are less effective for trending stocks.
Strength Indicators (momentum indicator)
Example: RSI

Indicator 2

(insert indicators as needed)

Indicator 3

(insert indicators as needed)

Strength indicators tend to reveal good examples of convergences and divergences which can help warn of a change in trend.
______________________________________________________________________
Total Points score: Positive points: Negative points:

The intention of this checklist is to provide a sample checklist for your trading system. Each investor should modify their checklist to meet their needs and risk requirements. It is also important to test your system and it is advised to paper trade a system rather than back-test your system. The reasoning behind paper trading versus back-testing is that back-testing removes the human factor which is extremely important.

Your checklist should also have a "reason to buy" score as well as a "reason to sell" score. It is the technical analysis part of an investing system where the trader can maximize their investment potential and beat the market average. The ability to buy or sell a stock when the trend has changed is a powerful tool and it is when you sell that you make or lose your profits.

Tips:

  • Don't fight the market, you won't win
  • Don't fight the trend, see #1.
  • Sell when you are wrong, better to loose 5% than 50%.
  • Don't sell right away when you are right! Wait till the trend weakens or changes. This pays for your wrongs and your bragging rights.
  • The market is always right even when you are convinced you are.
  • Don't trade with your emotions, thinking someday it will come back up is not a sound investment strategy. Build a checklist and stick with it, when you are wrong fix your checklist and get out early. It is the long term that is important.