Learning how to pick the best stocks to buy can be a daunting process, even for those who have been trading for some time, but this need not be the case, and the first question we need to ask ourselves is 'why we are buying?' For example an investor looking to buy and hold for 5 to 10 years would have a very different selection criteria to a short term day trader, or an equity option writer. So before rushing in to buy our stocks we need to have a very clear idea of our goals and objectives for the stocks we are proposing to buy. For the purposes of this article I am assuming that we are looking for stocks for a medium to longer term buy and hold strategy.

As a full time, mainly technical trader, I have found over the years that the simpler the system for selecting suitable stocks the better, and the good news is that virtually all the information needed to select the best stocks to buy is now freely available on the internet. All that is required is some effort, a bit of hard work and lots of practice. The approach I use to identify good stocks to buy is largely a technical one, but does also include elements of fundamental analysis at the macro level. The process is fully explained on my websites but the principals are as follows:

The first step to consider is the economy of the country where you are investing, as some stocks and sectors perform better in recession, than in expansion, and vice versa. As an example, utility stocks generally perform well in early recession as the professional money is looking for safe stocks with guaranteed income streams. Having done this the next stage is to look at the main indices of the country and to establish a long term view from the charts. In the US this would be the S&P500 or Dow Jones 30, and in the UK the FTSE100, 250 or 350. We then start to drill down into the sectors, looking for stocks that are performing well and in a long term uptrend. The only indicators I use at this stage are volume, and simple moving averages. I am looking for unusual volume patterns, in combination with specific candlestick formations, as well as lines of support and resistance for signs of a breakout.

Having identified some possible prospects I then filter these on a daily basis looking for a 2% increase in price on the day. This 2% movement helps me to identify stocks which are active. The buying process has still not arrived as there are still a number of other factors which need to be investigated. These include earnings and dividend dates, and details of directors' dealings, as these may give clues or warning signals. Once I am satisfied I will then buy the number according to my money management rules (these details too are on my website). The final step is placing a stop loss in case the price trend reverses. In the early days of any stock purchase the number one priority is preseveration of capital.

In essence the whole process can be summed up as starting at the macro level and moving down to the micro in a series of stages, using both technical and fundamental data. It is an uncomplicated system but one which I have found to be extremely successful. For a novice investor or trader an excellent and risk free way to try out this strategy, as well as the quickest way to learn about the stock market, is by using a free online stock market game. These provide an excellent introduction to the world of stock trading, but without risking any real money when you start - it will however teach you how to manage and place trades, both long and short, as well as allowing you to place stop loss orders to manage your trades safely. Signing up is free, and best of all some of the games even offer prizes on a daily or weekly basis for the best performing stock portfolios - so you have nothing to lose (unlike the real markets!!)