Stock Trading System – Steps to Select Best Stock Market Picks
Stock screening is extremely important if you are serious about stock trading. The process to screen the stock market 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.
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Here’s the 5 simple steps to help you getting started on stock screening.
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 price as our entry price when we look at the end of day data.
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.
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.
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. Pick a stock that gives you a reward/risk ratio of more than 2, you can pick a higher ratio if you are a conservative trader or pick a lower value if you are a risk taker.
In conclusion, this 5 steps may look and sound simple but it is the survivor skill to help to be successful in your stock market trading.