Monday, November 24, 2008

Researching stock trades

There is an abundance of information you can get on any company or mutual fund you want. You can search for it on the web or you can request information from your broker. But how much of this stock market information is actually valid, and how much is just useless?

Yes it is true you can get piles and piles of information on any company you choose. You can get balance sheets, income statements, analysis reports and much more. There is an abundance of information out there that can be easily obtained by the common investor.

But think about it for a second. If you can receive all of this valuable information about any company you want can’t anyone. Any financial document you read about a company will have been read by a million people before you. How valuable can it be in telling you whether a stock is going to go up or going to go down? Remember the markets are forward looking vehicles. All relevant financials have already been analyzed and factored into a company.

Yet the majority of people seem to believe this is the best way to make money in the market. It is not, for many reasons, everyone has access to this information, a company’s financials can lie, a strong company does not necessarily mean a strong stock, and the more you research a stock the more you fall in love with it, whether or not it is the best possible buy.

A much more scientific approach is to use chart patterns and price action to determine if a stock is a good buy or a good sell. The benefit to using price patterns is that price patterns already have all of the fundamental data factored into it, along with everything else that moves price. Another benefit is that price patterns occur over and over again and again. This provides predictable targets and stops which will allow you have some consistency in the market which is the first step to making consistent money.

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