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Criteria for Buying Stocks

Investors and traders all have criteria for buying stock or for selling stock. Criteria for buying stocks are part of an investment strategy or trading strategy. Accuracy in setting up such criteria goes a long way towards success in day trading and success in long term investing. Criteria for buying stocks can be implemented when an individual stock attracts the investor’s attention or can be implemented using computer software in order to screen an entire stock market for stocks that fit a predetermined set of criteria.

The point of using criteria for buying stocks is to obtain the best return on investment, reduce risk to a reasonable degree, and keep a diversified portfolio, which by itself is a way of reducing investment risk as well as increasing returns. There are a number of ways to set up stock picking criteria depending upon how detailed the investor wishes to be and what his or her long term investment goals are. Criteria for buying stocks also applies to day trading in that the best profits will often be made on the volatile stocks so the day trader will often have a different set of criteria for buying stocks than the long term investor.

Analysis of market sectors can help predict where the market will perform well in the near and long term future. At the turn of the last century auto makers did well and carriage makers went the way of the horse and buggy. Main frame computer makers lost business when the desktop computer came to be and chip speed increased. A strong understanding of market sectors helps pick stocks with better chances of making a profit in the stock market. Watching cyclical market sectors that have bottomed out allows the investor to pick a stock with a low price to earnings ratio before the company and the market sectors turns around.

Fundamental analysis leads to strong criteria for buying stocks. This has to do with evaluating the sales, overhead, past earnings, and market prospects of a company. How well is it managed, how effectively does it bring products on line, is its pricing effective, and so forth. This method looks at intrinsic value and is the basis of value stock investing. Finding stocks that are selling far below their intrinsic value is a favorite investing strategy of many very successful investors. Following a company’s earnings per share divided by its price per share, another way of saying P/E ratio, is especially effective in cyclical stocks when looking for support and resistance zones in stock trading.

Smart stock investing will always include criteria for buying stocks. The manner in which the trader or investor sets up the criteria will depend upon long term investment strategy and short term trading tactics. Using a stock screener set to the trader’s personal criteria is an effective way to see where he or she should be trading for the day. Using a stock screener will help the long term investor find value stocks that will lead to long term profits. A computerized stock screener can select stocks bases upon dozens of criteria. This capability is remindful of the “KISS” method of dealing with issues. “Keeping it simple, silly,” with no more than half a dozen criteria is probably a better way to start for beginning investing in the stock market. It is probably also good advice for those experienced in stock market investments as well.


Market Direction: Candlestick signals have a very important key element. They allow an investor to immediately evaluate whether a trend is reversing. This may sound like an elementary statement, but it is very important to be able to identify a candlestick reversal signal and evaluate what should occur to confirm that a reversal has occurred. As illustrated in the Dow chart, Friday's final hour of trading formed a Hammer/Doji in the oversold condition. This was a set up for a potential trend reversal. It created a very simple if/then analysis. If a reversal was occurring, Monday morning should illustrate the Bulls immediately participating. The bullish follow-through would make Friday's reversal signal a confirmed signal. The analysis from that point would be very simple. An uptrend should be starting with the T. line acting as the first potential target. Although that target may not be very far away, it provided the market direction to at least establishing some long positions. It would also be an indication to close out the short funds and potentially some of the short positions that were showing bullish strength. This is not a difficult analysis knowing what should occur after a candlestick signal.

The other scenario is quite simple also. The lack of bullish follow-through would indicate the downtrend was still in progress. The longer-term analysis, the J--hook pattern would  still  be the predominant analytical tool. Waking up to the bearish premarket futures was an immediate indication the bullish follow-through was not taking place. Although it appeared as the Bulls might be coming back into the market during the day, there still was not clear evidence their strength was enough to show a change of investor sentiment. The reason compelling bullish confirmation is required is because the Japanese Rice traders say the weight of the market could continue to push the market down. As witnessed late today, the Bears continued the downtrend.

DOW

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What is the best strategy for these market conditions? Obviously, existing short positions or short funds should remain in place until it becomes clearly evident the downtrend has shown a strong reversal signal. Although short funds may not produce the magnitude of returns found in strong 'sell' signals found in  individual charts, the three-leveraged funds produce a decent return while providing diversification. They also provide excellent liquidity. Holding these funds in the portfolio should remain in progress until a strong reason to close them becomes apparent. The qualifying word in the statement is "strong". As experienced on days like today, the potential of a bullish reversal made closing the short funds very tempting, especially when the markets are in the oversold condition. however, with the lack of that "strong reason" allows candlestick investors to hold the course.

Although the downtrend continues, there are price patterns setting up that will result in very large profits upon seeing a reversal of investor sentiment. PVTB is a chart that shows a classic pattern combination. A Fry pan bottom breaking out producing a very strong price moves. Now it is in a pullback mode, appearing to be setting up for a J--hook pattern. How is this useful? The anticipation of a third leg of a J--hook can be calculated based upon the price move of wave one. Upon seeing the markets showing a change of direction, investors can immediately start positioning themselves in patterns that are setting up for the next strong price moves. Knowing what each pattern visually looks like allows for good preparation for the next market move.

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The Candlestick Forum Online Training - February 20 and 21st - If you have been getting bits and pieces of the candlestick analysis logic from the Monday night and Thursday night training sessions, you should be recognizing one important underlying factor. The premise of candlestick analysis is merely common sense investment analytics put into a graphic depiction. There are no formulas. There are no extrapolating measurements. Candlestick analysis involves recognizing reoccurring signals and patterns and understanding the investor sentiment that created those signals and patterns. Once you understand why investors think in the reoccurring manner they do, you gain control of extracting consistent profits from the market.

Learn the candlestick signals correctly. The two-day online training reveals the simplicity behind candlestick analysis. Once you see all the pieces put together in an orderly manner, your investment perception becomes much more concise on how to make profits. Take this opportunity to learn a simple investment process that will improve your returns for the rest of your life. This is not rocket science. This is taking the common sense investment practices that you probably have heard over and over and putting them into practice. Candlestick signals have an immense amount of information built into them. Please take some time to learn how to use them correctly. The online training program is a very inexpensive and comfortable method for gaining knowledge that you will use for many years to come. Sign up now. The seats are limited. Click here for more information.

Chat session tonight at 8 PM ET. 

Good investing,

The Candlestick Forum Team


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