My book, Trading Basics , shown on the left, is the first book in a series of three called the Evolution of a Trader. It will teach you about the four styles of trading (buy-and-hold, position, swing, and day trading).

Picking Stocks Introduction

One of the frequently asked questions is how do I select stocks to trade? This page provides information on building a core group of stocks, ones you will want to hold for the long term. That may mean a year, three years, or longer. Michaels Stores, for example, was a stock bought out in 2006 that I have owned since 1989. So, yes, you can hold onto a stock for the very long term, and the longer you hold, the more likely it is to double, triple, or perform as well as Michaels. I bought and held shares from 1990 at a split-adjusted price of 88 cents and the buyout was at 44. That is nearly a 5,000% increase, and that is the type of return I seek from my core holdings.

Picking Stocks: One Approach

There are many approaches to stock selection and one that does NOT work is searching for stocks on the monthly scale, then the weekly, and finally the daily scale. What looks great on the monthly scale is trash on the daily scale.

Instead, do the reverse. Find a stock you like on the daily scale (or the scale you normally trade) then check the higher scales — weekly and monthly — to be sure the story is still compelling. If so, then consider buying.

Another method is to bottom fish. Look at stocks grouped by industry. If you find a stock making a new yearly low but it is the only one in the industry doing so, then stay away from it. Chances are it is a dog, a stock that may stay down for a long time while the others soar. Clearly, there is something wrong with the stock or else it would not be trading near the yearly low.

Look for entire industries that are weak. Then find a compelling situation within that industry. Take your time before you buy. Weak stocks have a tendency to get weaker and make new lows. When the bottom comes, price will make an ugly double bottom. The other stocks in the industry will be showing higher lows, too. If so, that might be the time to start nibbling. Price might still collapse, so be careful. Over the long term, a year or two, you will be buying near the bottom and setting yourself up for the double, triple, or better.

Buying an industry that is doing poorly takes courage. It is a dangerous play, but one that can lead to large profits over the long term.

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Picking Stocks: Approach Two

Bottom fishing, where you select weak industries, is risky because weak stocks and industries tend to remain weak, as outlined in One Approach. I have not had much luck bottom fishing. Remember the phrase that bottom fishing is like trying to catch a falling knife. You can get very bloody doing so.

Instead, much of my success comes from picking stocks and industries that are making new highs. These strong relative strength stocks and industries tend to remain strong.

I understand that it takes courage to buy a stock after it doubles, as in the case of a high and tight flag, but see if you can make it work for you. Buy stocks breaking out to new highs. Buy stocks that show a descending triangle with a downward breakout that reverses and then breaks out upward. These busted chart patterns tend to do well and if you combine them with being close to the yearly high, so much the better!

Buying at or near the yearly high means you dont have about overhead resistance setup by prior peaks or valleys because there are no prior peaks or valleys, only round number resistance (10, 15, 20, and so on).