The stock exchange allows the general public to participate in ownership of the most valuable companies in the country. By participating in the stock exchange therefore, you are directly contributing to building the country’s economy because the equity that is raised by the companies is used to bolster their growth. Growth of the companies in turn, means growth of the economy.
Choosing stocks, or rather choosing to invest in a company’s equity with the anticipation that the value of the stock will improve, is therefore an important skill to have.
When trading in stocks, it is important to only use discretionary capital; in other words, money that you can afford to lose, because despite all the fundamental and technical analysis that you may do, there is some risk involved. That said, there are ways of choosing and investing in stocks, such that, the probability of losing on an investment is highly minimized.
The information below can help you make an evaluation of the best stocks to invest in.
- Determine the General Trend of the Market
The first thing that you should do when determining whether to buy a stock or not, is to establish the general trend of the stock. There are several ways to do this, but the easiest way is to watch the indexes and the stocks that make up the index.
The indexes simply average out the price action of all the stocks in a particular industry and can therefore help you determine how a particular stock is performing in comparison to other stocks in the industry. Generally, if the overall trend of an index is positive, then the stocks in that index should be strong.
You can do further analysis of the indexes through technical analysis indicators, like simple moving averages and exponential moving averages, to determine the strength of a trend in relation to a specified time period. The major indexes to watch out for are the Dow industrials, the Standard and Poor 500 (S&P 500), and the NASDAQ.
- Learn to Read Chart Patterns
After you have used the indexes to determine the stocks that you need to watch out for, you can begin to drill down on a more granular analysis of a particular stock. You could do this by having a look at the different timeframes of the stocks charts to determine an appropriate entry level to purchase a particular stock.
In essence, you want to purchase stock when its value is low enough to still have room to increase in value. The value of stocks is constantly increasing and decreasing in value based on its supply and demand in the stock exchange. The key is to determine when the dips in share price happen, and to determine if the share prices are likely to increase.
Determining the buying range of a particular stock can be done in several ways including, using price action patterns and indicators (a set of known mathematical calculations).
For example, price action patterns, such as double bottoms, triple bottoms, cup and handle, or indicators, such as MACD, or moving average convergence divergence, and 20-day simple moving averages can be used to determine high probability buying ranges.
You could get a high probability successful trade by making sure that you have a confluence of positive reasons to enter a bull market at a specific price point.