The majority of investors needlessly complicate matters when it comes to finding the best stocks to trade.  It doesn’t matter if you use fundamental analysis or technical analysis, there is usually no need to make things overly complicated.

Remember, the goal in investing is to buy low and sell high.  While this is a very easy concept to understand, many investors needlessly complicate the simple idea.

The primary reason for the complication is because investors do not have a simple step by step procedure to locate stocks trading at a discount and ready to move higher.

Here’s an easy to follow, step by step technical analysis  method to easily locate discounted stocks that have the best change of quickly climbing higher.

Here are the three steps:

The first and most critical step is to only consider stocks trading above their 200 day Simple Moving Average.  The 200 day simple moving average is the line in the sand that differentiates strong up trending stocks from those stocks that are floundering.  Institutions generally only use the 200 day SMA when making decisions hence its critical importance.

Screen for stocks that have fallen for 5 days or more in a row.  I know this sound really odd, but value is found in stocks with dropping prices.  Obviously, if the stock has fallen below its 200 day SMA, don’t use it.

The third and final step is to take the stocks left over from the first two steps and screen them for a 2 period Relative Strength reading of 2 or less.  This is another counter intuitive screening method.  However, the studies I have seen all confirm that this is a most effective stock market indicator.

These three steps will provide you with several stocks that you can drill into deeper by looking at the fundamental picture.  Obviously, you can buy these stocks based on the price criteria alone, but using a final fundamental screen can help avoid clear losers.

Be sure to look at the basics such as earnings, management changes, revenue and standard news items.  Make sure there are no red flags like the CEO has been replaced by his 10 year old son or anything crazy like that.  In addition, seeing increasing revenue and earnings despite the recent price fall are great signs that a bounce will soon occur.

Finally, no matter how confident you are in your stock screening system be sure to always use stop loss orders.  No method or system is completely foolproof.