5 Simple Steps to Select The Best Stock Market Picks

Do you have plan to select the best winning stock market picks for yourself? The reason that 80% of people in the stock market are losing money because they do not have a stock market trading plan to guide them how to select the best stock market picks.

To be an effective trader in the stock market, you must have a trading plan. That’s the habit of first thing first of 7 habit of highly effective trader.

Let’s explore the 5 simple steps to help you selecting the the best stock market picks now.

A trading plan consists of 2 elements: Stock Screening & Position Sizing.

Stock screening is none other than a process to guide you to select for the best stock market picks that can possibly give you the best reward at the minimal risk.

Step 1: Screen the Stock Market

There are hundreds and thousands of strategy to screen the market. Some people use a moving average method to screen which I use a lots myself, some people use indicator like MacD or ADX or RSI to screen the market, or some people use candlestick or volume to screen. They are all fine as long as you pick one method.

Step 2: Estimate Your Entry Price

You must pick an entry price using your screening strategy. Majority of us are part timer traders and we do not have the time to sit in front of the computer monitoring the market. Therefore, we can use the closing price or open prie as our entry price when we look at the end of day data.

Personally, I like to use the close price as my entry price. I will trade based on the closing price when the market opens the next day.

Step 3: Estimate Your Stop Loss Price

Trading or investing in the stock market is a probability game. There are chances of winning and therefore there are chances we may lose. However, we must limit our loss when we are losing. Therefore, we must determine the stop loss price based on our entry price determined earlier.

Again, there are various method to determine the stop loss price, some people use a 5% loss of entry price, some people use a average trading range (ATR) or resistance/support levels.

Personally, I use the resistance and support a lots. I will use the support as my stop loss when I am going Long and I will use the resistance as my stop loss when I am going short.

Step 4: Estimate the Profit Target

Similar to stop loss, we must know when we are going to realize our profit. If you remember the 7 habits of highly effective trader – begin with an end in mind. We must know our the goal or destination we are going. In this case of trading plan, we must know where is our target price.

Again, there are numerous method available in estimating a profit target, support/resistance remains as one of the method. There are also methods such as fibonacci retracement or projection, price projection of classical chart formation, fixed percentage of entry price, bla bla bla, the list goes on.

Personally, I prefer the support/resistance method. I will use the immediate resistance as my target when I am going Long and I will use the immediate support as my target if I am going short.

Step 5: Compute the Reward/Risk Ratio

Reward/risk ratio is an important step to determine our success. Reward is the price difference between your entry price and your profit target, while risk is the price difference between your entry price and stop loss. Finally the ratio between the 2 differences become our reward/risk ratio.

Again, different people will use different ratio to do a final screen for their stock candidate on the nex day. There is no perfect ratio. As a part time traders who do not monitor the market during market time, we will use reward/risk ratio of 2 as a good reference when we are looking at day chart. It means that the expected profit must be 2 times more than the risk we are taking. Some day trader use a reward/risk ratio of 1 as they are willing to bear a higher risk. But they are willing to do so because they can monitor the market looking at 5 minutes chart or 15 minutes and make decision based on that.

Be more conservative at the start and don’t be greedy, you can also adjust your risk level when you are getting more confortable later.

How do you use this 5 steps process of trading plan?

Firstly, you screen the whole market based on your entry method (Step 1). Likely you may get 30-50 stocks to look into. That’s your preliminary screening. However, I am sure we do not have enough capital to buy into all the 30 or 50 stocks. We must better select the best candidate.

Step 2 – step 5 are the process to refine our preliminary candidates. We want to use the best candidate from our screening result. So, we determine the entry price, stop loss, profit target and finally we arrive at a reward/risk ratio. Prioritize your candidate based on the reward/risk ratio, select the top 5-10 candidates to trade on the next day.

This 5 simple stock market picks screening steps are the proven and practical approach to increase your probability of winning. If you are serious about making money in the stock market, you must start performing this 5 simple steps to select your best stock candidate today.

Stock Market Trading Plan

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