Dramatically Increase the Success Rate of Your Trades:
1) Overall Market Analysis
Before entering a trade, it is vital that you look at the condition of the overall market. Is it bullish or bearish? If you are looking to take a long position, you’ll want a bullish market. If you’re looking to take a short position, you’ll want a bearish market. I check price action of the S&P 500 (SPY) for this phase.
2) Sector Analysis
The next phase involves checking performance of the sector. For this step, you can check performance of various ETF’s/ETN’s that may represent certain sectors. If a sector is hot, like healthcare for example, you may want to consider investing in a company in that sector (drug manufacturers, medical equipment manufacturers, etc.).
3) Technical Analysis (of the Individual Stock)
If the overall market and sector look appealing, you move on to technical analysis of the specific stock. For me, this mainly involves looking at candlestick charts. Steve Nison is the King of Candlesticks, so I would recommend you give his Candlestick Course a read if you’re serious about trading. These charts show price action and areas of support/resistance. If the stock is oversold, basing at an area of support, and/or accumulating (beginning to develop higher highs and higher lows), you may be looking at a winner. Don’t forget to consider the risk/reward aspect during this phase. Are the patterns showing enough range? Is it even worth it to make the trade?
If the results of the first 3 phases meet your personal set of criteria, you move on to catalysts. This is arguably the most important phase and can cause a stock to move 10…20…50…or 100%+ in a short period of time! A catalyst is a reason for the stock to move, whether that be a news story, press release, rumor, conference call, contract signing, and many more. As a trader, you want to search for this news and position technically before the rest of Wall Street fully reacts.
Make sure stocks meet your personal set of criteria before investing! If you use these 4 steps of analysis for your trades then you will have a much higher chance of Beating Wall Street time after time.
Written by Matthew Thomas