Heard about any great stocks lately? Maybe your cousin, a broker friend, or your neighbor gave you a hot stock tip, but how do you know if it’s any good?
First and foremost, always follow this rule: NEVER blindly follow anyone’s stock picks without doing your own research first. No exceptions. I hear from waaaay too many people who lost colossal amounts of capital because they didn’t follow this rule. Don’t be one of them!
If you have some picks you’re interested in, it’s time to start digging. The next part is all about putting your stock market knowledge and research skills (like my Trading Challenge students learn) to work.
Here are some things you need to know when you’re checking out stock picks, and a straightforward breakdown on how you can start finding your own picks right now.
Download the key points of this post as PDF.
Table of Contents
- 1 What is a Stock Pick?
- 2 How to Find Your Own Stock Picks?
- 2.1 #1 Research the Company Fundamentals Before Choosing a Stock Pick
- 2.2 #2 Find Stocks in Uptrends
- 2.3 #3 Use Stock Chart Patterns
- 2.4 #4 Look at Current Events
- 2.5 #5 Trade Volatile and High Volume Stocks
- 2.6 #6 Take Advantage of Pre-Market Opportunities
- 2.7 #7 Choose Good Stock Market Scanner Software
- 2.8 #8 Use A Good Broker
- 2.9 #9 Keep Improving Your Trading Knowledge
- 3 The Bottom Line
What is a Stock Pick?
Let’s start at square one …
Stock picks is where a trader, analyst or investor finds a stock that meets their criteria, in hopes the stock is ready to make big gains.
It’s the goal of most trader to get capital into the highest-performing stock picks, and not lose much on the picks that aren’t so hot.
What Smart Traders Look for in Promising Stocks
Most traders who buy a stock want it to start moving up in price as soon as they buy it. The reasons for that happening could be all kinds of things, like:
- Buyers flooding into the stock due to a news story or newsletter recommendation.
- A stock breaking above its all-time high price on high trading volume.
- A famous investor revealing that he’s buying up the stock.
- The government announcing a policy that could mean huge profits for the company.
I could write about a thousand more bullets like this, but you get the idea.
A key idea is to look for situations that could create strong demand for a stock in the very near future, pushing the price higher. It can be anything, so make sure you keep your eyes open.
For example, when Carl Icahn, the famous activist investor and corporate raider, tweets about a stock, it can create a tidal wave of buying or selling within seconds.
How to Find Your Own Stock Picks?
I know some of you don’t want to learn how to pick your own stocks. That’s ridiculous!
If you want to blindly follow someone else’s picks, that’s your choice, but considering the lag time between when the “gurus” make their trades and the time their picks make it to your inbox so you can choose whether to make the trade, you’re highly unlikely to see the same results. Enough said.
My vote: Develop your own method to determine how to pick stocks. If your goal is to be an independent trader, then this is the route you want to follow. Here’s my nine-step plan to help you learn how to do it.
Every trader is different, so feel free to mix and match or add in your own things. Right now, pause and channel the mindset of a successful stock picker, and then keep reading.
Got it? Here we go …
#1 Research the Company Fundamentals Before Choosing a Stock Pick
The first thing you need to do is get an overall view of the company’s finances because you want to make sure the company:
- Isn’t complete tripe
- Has some chance to make profits in the future
- Isn’t hemorrhaging cash
- Isn’t being fleeced by the executive team
- And so on
A good way to get a company’s overall view is by looking over the 10-K forms, which cover its financial reports. These reports are required by the U.S. Securities and Exchange Commission (SEC) to be filed yearly, but as with everything in the stock market, should generally be viewed with a skeptical eye.
The steps you use to assess the fundamentals of a company depend on your trading or investment method, but here are a few common fundamental analysis activities …
(Want even more info about stock research? Check out my definitive guide.)
Checking the Balance Sheet
A company’s balance sheet is a breakdown of a company’s assets and liabilities. These are things like property owned, debts owed to banks and other companies, etc.
If you get lucky, you may even find a stock that has net assets per share of less than the price of the share. That can basically be like buying a dollar for less than a dollar. But always be cautious, because there are tons of sharks and scams out there.
Analyzing The Company’s Recent Earnings Reports
Companies are legally required to file a quarterly earnings report, the 10-Q. This is basically the company telling the public how much money it’s making or losing.
Traders and investors review these reports to gauge a company’s financial health. When you check out an earnings report, you may notice patterns such as earnings picking up in an unexpected area before other investors notice. Remember, turn over every stone!
For more info, check out my post on how to read and understand earnings reports.
Valuing the Stock
I’m not a big company valuation guy; I’m more about hype and chart patterns. But I can’t write a post about picking stocks without explaining valuation.
Many investors analyze company fundamentals to get an idea of whether the stock of a company is cheap or expensive. They use all kinds of ratios and figures to come to a conclusion of a stock being worth a certain price.
For example, through their analysis, they may determine that a stock is worth $10. And if the stock is trading at $10, that’s possibly an underpriced stock.
Even if you don’t want to deep-dive into valuation, it’s good to keep an eye on whether other investors and traders might think a stock is cheap — it could create a flurry of buying and selling opportunities.
#2 Find Stocks in Uptrends
Warren Buffett doesn’t look for uptrends. He typically holds stocks for decades. So as long as he buys a good company, he’ll probably make money over the time he holds its stock.
Many traders, however, aren’t interested in Buffett’s route — they want to start profiting from their stock picks right away, or at least in the next few weeks or months. If that’s the case, they often put their capital into stocks that are already steadily trending upward.
An uptrend is when a stock price is making smooth, consistent higher highs and higher lows on the stock chart. When stocks move in one direction, they sometimes keep climbing. That’s good news for many traders.
#3 Use Stock Chart Patterns
Now that you’re familiar with research and uptrends, it’s time to learn chart patterns. A good chart pattern should increase the odds of getting on board a stock ready to move.
Here are two of my favorite patterns:
This is the pattern that excites me the most.
A supernova is where a stock generates hype, whether it’s media coverage, a company announcement, a global event, or anything else you can think of.
As the hype builds, we often see massive volatility and an increase in trading volume as traders rush to jump on board. These prices can run like a freight train — but it’s up to you to decide whether to ride it.
Supernova events frequently end in a collapse, so there can also be an opportunity to short them on the downside.
Here’s a video I made about supernovas…
The Stair Stepper
The Stair Stepper is a traditional uptrend. This is where a stock rises, pauses, rises, pauses, and so on, making higher highs and higher lows — just like climbing a staircase.
This pattern is a relatively low-stress way to play a stock since you’re constantly seeing either price move in your favor, or at least not move too far away from the recent high. This can be a great pattern for newbies to trade.
#4 Look at Current Events
If you’re interested in finding stocks with hype and rapid movement, it’s important that you stay on top of news and current events that could affect stock prices.
Things to look at are earnings updates, analyst reviews, conference calls, newsletter recommendations, SEC filings, and anything that could excite the market into pushing the price around.
#5 Trade Volatile and High Volume Stocks
Unless you’re into the buy-and-hold thing, it’s no use locking your capital up in stocks that will simply lay dormant and barely move in price for months or years. If your money is tied up in those stocks, you can’t play the big movers.
If you’re looking for faster-paced trading opportunities, you’ll probably want to focus on stocks that are moving and experiencing uptrends and hype. I think they’re way more fun than buy-and-hold stock picks.
Besides monitoring volatility, you also need to keep an eye on the trading volume. Dig for stocks that trade enough each day to allow you to pick up shares at the price you want, and have enough volume to accept your shares at a good price when it’s time to get out.
#6 Take Advantage of Pre-Market Opportunities
If you’re at your screen before the market opens and you’ve found a stock that made a major announcement or had an unexpected event happen overnight, then jumping into the pre-market session could potentially mean you’re one of the first buyers before the stock skyrockets.
The pre-market session involves trading done outside market hours. It allows you to trade stocks from 4–9:30 a.m. Eastern time. Pre-market volume is typically low, but when you’ve got a hot news item, it could be a smart way to get on board.
If you’re interested in this type of trading, make sure your broker allows pre-market access. I’ll share more about brokers in a minute.
#7 Choose Good Stock Market Scanner Software
If you’re ready to start finding your own stock picks, the right trading software can help make it easier.
I recommend StocksToTrade, where you can scan the market for increased volume and big movers. It’s a killer platform that I use every day — I even helped with its design!
StocksToTrade helps you cut the amount of time, stress, and anxiety many traders experience behind the keyboard and only deal with the handful of real trade opportunities daily.
This comprehensive software for traders of all experience levels offers all the tools you need in one place, which prevents you from having to bounce around between programs. You can test it out with a free trial.
#8 Use A Good Broker
There are a ton of brokers out there, but you have to make sure you pick the right one for your needs.
If you’re experienced in the markets, you’re probably set up with a good broker, so you can probably skip this part.
If you’re a newbie, you might like TDand E-Trade. Both are great, well-capitalized American broking firms with decent commissions and plenty of features.
For my thoughts on the best vs. worst brokers, check out this video I made …
#9 Keep Improving Your Trading Knowledge
If you’ve been following me for a while, then you know I emphasize this over and over: Never stop learning.
When I started out, there was hardly any information out there to show me the way. I had to do it the hard way — but you don’t have to.
If you’re serious about learning to find your own stock picks, apply for my Trading Challenge. It’s my way of nurturing the new generation of investors — hungry, eager people who have specific goals and dreams.
Through the Challenge, you get access to all my resources, trades, commentaries, webinars, and more. Plus, you get the chance to learn from my top students.
I can’t trade for you. And anyone who says, “Just follow my stock picks” is a scammer! Remember the old adage: It’s better to teach someone to fish than to do their fishing for them.
That’s what the Trading Challenge can provide.
The Bottom Line
Picking your own stocks is the smartest way to trade, but you have to know what you’re doing.
Remember to research like crazy, approach the stock from both the fundamental and technical angles, and look for situations that whip the market into a frenzy and push prices higher.
Be disciplined and do the work every day. Most importantly, keep learning and developing your skills. If you need help, I’m here for you.
What’s the wildest stock pick you’ve ever made? I want the juicy details. Comment below!