A question I get asked a lot is:
How do you determine whether a stock is good to buy?
So without further anticipation here is a quick 4 step method I use to determine whether a stock is buy worthy.
1. What is the chart telling me?
Are there any patterns that stand out to me? Are the indicators such as RSI and MACD in a bullish spot? Finally, what is the volume pattern? I tend to stay away from large red bars. The more you familiarize yourself with these technical analysis tools, the quicker you will able to read a chart.
If everything pans out, then I move on to step 2…
2. Major news
Because I put a lot of emphasis on charts and technical indictors, I really don’t pay attention to the news too much; however, its always nice to see if there is any major or pending news stories with a company. Obviously, if there are talks of going bankrupt or being sued, then that might not be a company you want to deal with.
If all is good so far, then I move on to step 3…
3. Average volume
The amount of volume trading in a particular stock usually tells you how liquid that security is… more volume means more people are trading it, which means shares are probably easy to come by and so on. Stocks with low volume could also mean a huge move is less likely, especially in such short time frame. I don’t like to trade stocks with volume less than 500,000.
If the stock’s average volume is more than 500,000, then I move on to step 4…
4. Set price targets
I have just completed a swift background check of a particular stock, so now its time to set up all my price targets: entry, price, and stop.
On average, usually all 4 of these steps take less than 5 minutes, which is a great time saver if you ask me. If you want to learn more of my techniques, trading method, and overall technical analysis skills, then check out Chart Pattern Manifest.