Developing an Investing/Trading Plan – Part VII

by: Bill Zimmer Monday, January 5th, 2009 at 9:56 am

Develop A Strategy for Buying

Regardless of the Markets you decide to trade, i.e. stocks, futures, or derivatives you need to develop a strategy of how you are going to go about buying.  Here are some considerations:

  1. 1) How are you going to find stocks to trade? For example: stock screeners, news, research, technical analysis, fundamental analysis, or a combination (if a combination state what that combination is).
  2. 2) How will you refine your “buy list” (stocks in your watch list that you are considering buying)? For example: valuation, screening further, great news, great earnings, strongest technically, strongest fundamentals or perhaps a combination.
  3. 3) What price are you willing to pay?  Sometimes the current price may not be the best price for your buying criteria. Will you wait for a better price? Move to the next stock in your list?
  4. 4) Does the stock have good volume? Very low volume history means you may not be able to sell the stock at the price or time you want. Keep this in mind. High volume means high liquidity. High liquidity means it will be easier to sell because it is more actively traded.
  5. 5) Using Technical Analysis: make sure you absolutely understand how the technical analysis indicators you use works. Your favorite indicator may not be useful on certain stocks and under different market conditions. You must know when to use indicators and when not to use them.  Proprietary indicators by others are nice but if you do not understand there composition it’s impossible to know when they are of value and when they are not.  If you must use proprietary indicators of others make sure to confirm your interpretation with other indicators you understand.
  6. 6) Using Fundamental Analysis: again, make absolutely certain you understand how fundamentals work. This means reading through past earnings reports and the company’s balance sheet, income statement, and cash flow statement. Sometimes a stock will have great fundamentals but will not move in the direction you expect due to other factors, such as the company’s future outlook.

Writing down your strategy will reinforce its use when decision time arrives.  A written strategy will also allow you to look back at your trading and determine if the strategy needs to be updated and will show you exactly where and when the strategy was violated for whatever reason.

Part VIII – Next Monday.