Stock picking is a very complicated process and investors have

different approaches. However, it is wise to follow general

steps to minimize the risk of the investments. This article

will outline these basic steps for picking high performance

stocks.

Step 1. Decide on the time frame and the general strategy of

the investment. This step is very important because it will

dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want

to find stocks that have sustainable competitive advantages

along with stable growth. The key for finding these stocks is

by looking at the historical performance of each stock over the

past decades and do a simple business S.W.O.T.

(Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you would like to

adhere to one of the following strategies:

a. Momentum Trading. This strategy is to look for stocks that

increase in both price and volume over the recent past. Most

technical analyses support this trading strategy. My advice on

this strategy is to look for stocks that have demonstrated

stable and smooth rises in their prices. The idea is that when

the stocks are not volatile, you can simply ride the up-trend

until the trend breaks.

b. Contrarian Strategy. This strategy is to look for

over-reactions in the stock market. Researches show that stock

market is not always efficient, which means prices do not

always accurately represent the values of the stocks. When a

company announces a bad news, people panic and price often

drops below the stock's fair value. To decide whether a stock

over-reacted to a news, you should look at the possibility of

recovery from the impact of the bad news. For example, if the

stock drops 20% after the company loses a legal case that has

no permanent damage to the business's brand and product, you

can be confident that the market over-reacted. My advice on

this strategy is to find a list of stocks that have recent

drops in prices, analyze the potential for a reversal (through

candlestick analysis). If the stocks demonstrate candlestick

reversal patterns, I will go through the recent news to analyze

the causes of the recent price drops to determine the existence

of over-sold opportunities.

Step 2. Conduct researches that give you a selection of stocks

that is consistent to your investment time frame and strategy.

There are numerous stock screeners on the web that can help you

find stocks according to your needs.

Step 3. Once you have a list of stocks to buy, you would need

to diversify them in a way that gives the greatest reward/risk

ratio. One way to do this is conduct a Markowitz analysis for

your portfolio. The analysis will give you the proportions of

money you should allocate to each stock. This step is crucial

because diversification is one of the free-lunches in the

investment world.

These three steps should get you started in your quest to

consistently make money in the stock market. They will deepen

your knowledge about the financial markets, and would provide a

sense of confidence that helps you to make better trading

decisions.