Stock Selection Process

There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.

Jack Schwager

 

When I entered the markets and started exploring my way to get to the holy-grail of the market, one of my friend suggested to approach the market through Fundamental analysis,other suggests, trading with Technicals is the best way as it is difficult to asses what happens to the stock over the next 3 or 5 years...

...other suggestions are

• trade options 
• trade futures
• use RSI,MA
  
• use quants
• etc, etc. 

 

Finally I decided to approach the market considering some Fundamentals like good ROE, low debt or good Interest Coverage ratio. With this my watchlist is ready. Now apply Technicals to enter and exit the trade. 

My thought process to approach the markets like this is to cover the important aspects of both Fundamentals and Technicals. 

Select good Fundamental company with the below parameters

• Market Cap > 2000 (relatively stable companies)
  
• ROE > 15% (3 year average and 5 year average)
• Debt to Equity < 0.55 (or reducing debt)
• Interest Coverage Ratio > 3 (important for high debt/Banking/Finance companies)

apply the filter on screener.in

Technical Analysis - Which Time Frame is Best

Lets understand the time frame based on financial cycles. Banks, Companies, Partnership firms, Financial Institutions, etc follow Yearly cycle to report their company performances. This annual cycle is further divided into 4 quarters and we get unaudited financial reports. 

Based on the above time-cycles we can come to conclusion that quarterly and annually we can assess the performance of the companies. 

Most of the companies year ends on 31-Mar, which is a 365 day tenure. During this 365 day period, variety of News flows in the Market in relation to the company. 

News can be... 

1. Company Corporate actions 

2. Policy Changes by the Govt. 

3. Demand/Supply issues in the Market 

4. Geo-Political issues 

5. and rumors floating around 

 

For every information that comes out in the main stream Media, Social Media, has a reaction on the stock price. We can view that reaction on the chart of the stock. The best way to view this is on a Candle Stick chart. 

To assess what's happening with the price, it is advisable to follow Simple Moving Average of the price. Now comes the question, what is the best Moving Average period to follow. 

 

This is the simple Math to follow... 

1 year : 365 days

Working Days : 52*5  = 260

So, we can expect 260 candles on the chart, but then, we need to include holidays too.. which in general are 10 days. 

Including the holidays, the number of candles that we can see on a yearly basis is going to be around 250

Stock Market : Technical Analysis

What is technical analysis?

Technical analysis is a reference point based on which you want to take a decision. Let's take an example, we have different calendars around the world, below are some of the popular ones...Vikram (Hindu), Gregorian, Japanese, Buddhist, Hebrew, Hijri, Hebrew, Julian, etc

If you study these calendars, you can notice one thing, they have a reference point, it's mostly either, solar, lunar  or both.

Each calendar has it's own new year, Gregorian says new year starts on Jan 1, based on Hindu calendar, New Year is pivoted on the first New Moon after March Equinox. Similarly other calendars too have their own New Year starting points.

Now the question is which one is perfect calendar!! 

Let's relate this discussion with technical analysis for stock market. In technical analysis, there are hundreds of indicators similar to calendars. All these indicators are based on either price, volume or both.

 All you have to do is pick an indicator, understand it in depth. Start observing it on daily, weekly and monthly timelines. You will understand there are boundaries to all the indicators, there is no perfect indicator nor perfect timing. 

Whenever you take trade decision to take a trade, make sure you have a planned exit, both on profit taking side and loss booking side. If you are wrong with your decision, do not hang around expecting that the price will comeback. The faster you realize that your trade will take your money, exit the trade.

 

Read this article on how to Pick and Trade stock.

#PlanYourRisk