What are the types of stock selection methods ?
The stock market is a complex machine that can be studied in a variety of ways.
Various techniques are used to select stocks and assist traders in determining when a stock’s direction may change.
Each of these techniques has advantages and disadvantages…
The most important thing to remember is that no single technique will reveal all of the information you require about a company or its future performance.
That being said, there are 2 types of stock selection methods. They are based on
1. Technical analysis
2. Fundamental analysis
What is technical analysis?
Technical analysis is a method of analysing securities that involves the study of price movements as well as other indicators.
You can better predict the direction of a stock’s price movements and make more informed investment decisions if you understand how to use technical analysis.
Technical analysis is based on the assumption that asset prices will move predictably in response to underlying factors. These factors can include the asset’s supply and demand, trend, patterns etc.
How to use technical analysis to select stocks ?
You can apply technical analysis to the stock market in a variety of ways.
Top gainers and losers
The best stocks to buy and sell are those with the highest daily, weekly or monthly gainers and losers depending on your trading style. Then you can apply breakout or reversal strategy to enter and exit a trade. These can be found on stock market websites, which are updated every day.
A stock with a high level of activity is regarded as a top performer because it frequently indicates that people are buying or selling it. This can assist in determining whether the stock is a good buy or sell. This is mostly used by day traders.
Breakout, reversal & pullback
A breakout occurs when a stock crosses an important value area and continues to move in the same direction. You can choose stocks based on the breakout of a chart pattern, support or resistance, trend line, and so on.
A reversal occurs when a stock price does not cross a level but instead reverses from that area and moves in the opposite direction. Stocks can be chosen based on trend reversal from support or resistance.
A pullback occurs when a stock moves in the opposite direction for a short period of time. You can choose stocks based on a strong trend’s pullback.
Indicators or price action signals
You can also trade based on the day’s, week’s, or month’s indicator and price action signals.
What is fundamental analysis?
Fundamental analysis is not used for scalping or intraday trading unless there is significant news from the company or industry, such as earnings announcements, global news, or other events.
Fundamental analysis, or analysing a company’s financial statements and other data to determine its health, can, on the other hand, help swing or positional traders make informed decisions about whether to buy or sell stocks.
How to use fundamental analysis to select stocks ?
You can select stocks by analysing the news or fundamentals of a company.
First and foremost, always conduct thorough research. Understand and be able to analyse the company’s financial statements and trends.
Fundamental analysts consider four major factors when evaluating a stock: its income statement, balance sheet, cash flow statement, and market value.
The income statement shows how much money a company made in the past, whereas the balance sheet shows a company’s financial strength. The cash flow statement demonstrates how much cash a company has available to spend, whereas the market value demonstrates how much a stock is worth on the market.
Second, consider the company’s industry. Conduct research to determine whether you believe the company’s sector is in good or bad shape.
Finally, make sure that your trades are properly executed. Always plan ahead of time and stick to it.
These are the basic categories from which to choose stocks. There are numerous additional methods in each category that we will look at later.