I have been trying to learn how to select profitable stocks for quite some time and have been doing a good amount of reading on the subject. I have had some interest in day trading, long term trading and short selling all which have proven to not be so profitable for me thus far.

The subject of investing in stocks appears to be really broad. My question is, other than reading books on technical analysis and support/resistance, what top 5 skills does one need to have in order to select profitable stocks?

I am primarily interested in, short-term (weeks-months) trading and day-trading.

P.S I am currently reading a book called Technical Analysis of The Financial Markets by John Murphy, good so far.

  • 1
    Obligatory Will Rogers quote: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." – Pete Becker Nov 19 '15 at 3:05
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    You are not investing - you are trading. I'm guessing you want advice on that instead ;) – Ross Nov 19 '15 at 14:30

You need to have 3 things if you are considering short-term trading (which I absolutely do not recommend):

  1. The ability to completely disconnect your emotions from your gains and losses (yes, even your gains but especially your losses). The winning/losing on a daily basis will cause you to start taking unnecessary risk in order to win again. If you can't disconnect your emotions, then this isn't the game for you.

  2. The lowest possible trading costs to enter and exit a position. People will talk about 1% trading costs; that rule-of-thumb doesn't apply anymore. Personally, my trading costs are a total 13.9 basis points to enter and exit a $10,000 position and I think it's still too high (that's just a hair above one-eighth of 1% for you non-traders).

  3. The ability to "gut-check" and exit a losing position FAST. Don't hesitate and don't hope for it to go up. GTFO. If you are serious about short-term trading then you must close all positions on a daily basis.

  4. Don't do margin in today's market as many valuations are high and some industries are not trending as they have in the past. The leverage will kill you. It's not a question of "if", it's a when.

You're new. Don't trade anything larger than a $5,000 position, no matter what. Don't hold more than 10% of your portfolio in the same industry. Don't be afraid to sit on 50% cash or more for months at a time. Use money market funds to park cash because they are T+1 settlement and most firms will let you trade the stock without cash as long as you effect the money market trade on the same day since stock settlement is T+3.

  • Coolness - It's not only a matter of staying calm when being up or down. You must keep yourself from chasing a stock that appears to be running away. Or from betting all your money that something(like say a crash) will happen tomorrow because that would be great for you. Use your head not your heart.

  • Empathy - You need to understand what other speculators, investors, institutions and algorithms are going to do when there is a new development or technical signal. And why. For publicly traded corporations, fundamentals and technical indicators only have the value that people(and their algorithms) choose to assign to them at that particular moment. And every stock has a different population trading it. There is no rule of thumb.

  • Patience - To trade successfully, you must avoid trading at all costs. Heh. If you can't find any good trade to do, don't open positions in order to meet your targets, buy a new smartphone, or to fight boredom.

  • Diligence - If your strategy relies on tight stops, don't make exceptions. If your strategy relies on position sizing, don't close when you are a few points down.

  • Luck - In the end almost every trade can turn against you very badly. You must prepare for the worst and hope for the best. You can't buy luck, or get luckier, but you can attempt to stack probabilities: diversify, buy options to insure your positions, reduce holding time, avoid known volatility events, etc.

  • Most of my losing trades go: lose patience -> open position -> lose money -> ignore strategy -> lose more money -> lose coolness -> i'm feeling lucky -> lose more money -> close position. And that's already knowing the above. It's a fight against yourself for the money. – gengren Nov 19 '15 at 9:14
  • It is a 5 element list, but I'd say only skill 2 is needed to pick stocks. Up or down is all that matters. The other skills are to keep your money from being wasted away in the process. – gengren Nov 19 '15 at 9:22
  • you might want to incorporate those comments into your answer. – GS - Apologise to Monica Nov 19 '15 at 16:52

You would appear to be a swing trader, like myself. I have been trading futures and futures options for 29 years, and have both made and lost a lot of money in that time. My trades last hours, to days, to at most a few weeks. From my experience, the most important skills are:

1) Money management - keeping trade size small in relation to total capital. I typically risk 2-3% of my capital on a trade, so a loss is fairly immaterial.

2) Risk management - limit your loss on every trade, either by using stop orders, options, or a combination of these 2.

3) Emotional discipline - be prepared to exit a position, or reverse from long to short, or short to long, on a moment's notice. The market doesn't care where you entered, or whether you make or lose money. Don't let your hunches or the news influence your decisions, but follow the market.

4) Methodology discipline - test your analysis / trade entry method to ensure that it is objective, and has a reasonably good probability of success, then stick with it. Variation will inevitably lead to indecision or emotional reactions.

5) Flexibility - consider trading anything which can make you a profit, but ensure that there is a lot of liquidity. I trade 30 different futures markets, as well as various option writing strategies in these markets.

Feel free to reach out if you want to discuss further. I have about 500 (yes, 500) trading e-books as well, on every trading subject you can think of.

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