Your guide to picking up bargains

THESE days, it sometimes seems as if nobody seems to try to pick shares any more. Instead, they trade indices, the number of which seem to grow by the day, or other assets like currencies. But following individual companies trials and success remains a particularly satisfying way to trade. Here are a few tips to help traders focus.

No, we are not suggesting that marijuana will help your trading because it probably won’t. Chasing a stock that has broken through a record high, however, might. Professional traders often talk excitedly about “psychological barriers” and “tops”. They do this because once a stock has hit a record price it tends to climb. Jumping aboard that sort of price rally can be an easy way to make a profit on stocks. It’s a strange phenomenon, but stocks that have done well, tend to continue to do well, at least for a little while. It’s called the momentum effect, and economists are struggling to explain it, but it does seem to work well, at least for a few traders.

This may sound unpleasant, but as Manoj Ladwa of ETX Capital explains: “Some of our most successful clients are bottom pickers: people who look for stocks that have been oversold.” Often, when bad news hits a company, the market over-reacts, as traders tend to assume the worst. When it turns out that things really aren’t that bad, the share price recovers. Look out for companies that have suffered catastrophic share price declines and try to work out whether the panic was justified – if it wasn’t, it might be an easy profit. Be careful though: not everything that comes down must go up again.

Picking on companies that are heavily exposed to certain sectors can be a good way to chase a rally or dive. Airlines, for instance, are regularly hit by the change in oil prices. But for this reason, make sure you diversify the type of stocks you trade on – you don’t want to have all your capital wiped out by a shock occurrence.

As the old saying goes: “there’s no smoke without fire.” And this is especially true of stocks. If you hear a rumour about a company, jump on that trade – even if the rumour doesn’t come to fruition, the trade is likely to move in your favour. But be sure to get out before it’s squashed.

Loretta Young might have said: “A charming woman doesn’t follow the crowd,” but traders should. If people are pouring into a trade, it probably means something big is going to happen, and it’s worth joining in. Plus, the added volume will prevent irrational jumps in the share price and prevent you getting knocked out too early by your stop loss. Being contrarian might make you colossal returns sometimes, but there can still be strength in numbers. Don’t confuse following the crowd with being a lemming though.