Investing: How to Pick Money-Making Stocks (Screening)

The process of choosing stocks is not an easy task. There are so many factors to consider and it can be hard to find the right stocks to buy. However, with a few steps and basic filters, you can effectively reduce thousands of choices to a qualified short list of stocks that meet your specific criteria while aligning with broader market trends.

The first step in the process is defining what you want from your investment portfolio. This will help you define your criteria for selecting stocks. The next step is considering what type of investor you are and what kind of risk tolerance you have. This will help determine how much money should be invested in each stock, where it should be invested, and how long the investment should last for.

There are two common ways to sort and pick stocks; Fundamental and technical analysis. Knowing how and when to use them can be a matter of personal style, but each has its strengths.

Fundamental analysis attempts to identify stocks offering strong growth potential at a good price by examining the underlying company’s business, as well as conditions within its industry or in the broader economy and is ideal for long-term trades/investing strategies. It relies on metrics such as earnings per share, price-to-earnings ratio, price-to-earnings growth, and dividend yield.

Technical analysis, on the other hand, looks at statistical patterns on stock charts that might foretell future price and volume moves and ignores the underlying company’s fundamentals. Technical analysis is ideal for short-term trades.

The choice of which form of analysis to use depends on your goals and expectations. In this article, we’ll discuss technical analysis on this article.

Technical Analysis involves the following three steps:

Stock screening,
Chart scanning, and
Setting up the trade.

With screening the goal is to arrive at a list of 10 to 15 stocks that meet your set of technical criteria. You will then try to narrow that list down to three or four candidates by scanning the charts for possible entries, or points where it could make sense to buy. Finally, you will perform a more detailed chart analysis and choose the one you’ll trade.

Factors to consider when screening for stocks using technical analysis

Price and market capitalization – helps narrow down to stocks of specific price and company size right on the get go.
Sectors and industries – helps you pick the sectors and industry that exhibit the potential to fulfil your investment goals.
Momentum – helps you use technical indicators such as Moving Averages, support and resistance levels and Relative strength index to identify strong, up-trending stocks for potential buys.

Technical analysis indicators

The idea with technical analysis is that using a handful of technical indicators as a kind of sieve can help you sort through the broader market to identify, first, attractive sectors and then, the potentially attractive stocks within them.

Here are some of the indicators that you can use: -

Support and Resistance

If a stock is bouncing between a consistent low and a consistent high, it is said to be "range-bound." Horizontal lines at these price levels can help you identify two key levels: support and resistance.

Support is where downward trends tend to weaken as buying pressure overcomes selling pressure.

Resistance is often where upward trends start to die out as selling pressure overcomes buying pressure.

You can use these price levels to identify possible entry and exit points, whether you expect a stock to remain range-bound or break through, potentially signaling the start of a strong new trend.

Trend lines

A trend line can help you assess whether a stock has been trending in a particular direction. An upward trend is indicated by higher price lows during a given period while a series of lower highs, indicates that the stock could be in a bearish trend.

Moving Averages

Moving averages are lagging indicators that show price history of a stock. A moving average is the sum of the prices over a period of time divided by that time period.

E.g., a "50 day Moving Average" is the sum of the prices over 50 days divided by 50.

Moving averages compare current price to an average price over a stock’s history. If the current price of a stock is above its moving average is performing better than if the price is below the moving average. The common moving average time frames are 10, 20 50, and 200 days.

Volume

Volume indicates how strongly investors feel about a stock's current pricing. Larger volume indicates greater conviction from the market while lower volume may indicate less conviction.

The Relative Strength Index (RSI)

RSI is a technical indicator measuring the strength and momentum behind a stock's recent price moves. It can give you a sense of when a stock might have become over- or undervalued and possibly ripe for a reversal. RSI measures how much a stock has gained on its up days relative to how much it’s lost on its down days, over a default of 14 trading periods.

When a stock has an RSI above 70, it’s considered overbought and is about to go down, while an RSI below 30 suggests the stock may be oversold and could be ready to go up.

You can start filtering the market with these technical analysis indicators in hand.

More about Technical analysis in the video below.

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