Familiarity bias: the agony of choosing
How to find stocks for tradingWell, if familiar stocks are not always the best option, how do we decide what to trade?
Keep track of the news
If you trade CFDs on shares, you definitely want the ones that are moving and showing a reasonable degree of volatility. Surfing the financial news will give you some active names to look at. Company news – including earnings reports and mergers and acquisitions – could cause significant intraday movements, which bring with them their own buy and sell signals. So, simply following the news may bring you a list of potential trades.
Follow the top traded stocks
3. Check the top risers and top fallersThe lists of top risers and top fallers will give you the up-to-date picture of uptrending and downtrending stocks. Traders often take long positions on uptrending stocks and short positions on downtrending stocks. However, note that intraday trends don’t continue indefinitely, so use technical indicators, such as the trendlines or moving averages, to spot changing market dynamics.
4. Choose the strongest from an uptrend and the weakest in a downtrendVery often, when choosing a stock to trade, it’s reasonable to look at the performance of a correlated index. When the index moves higher, traders often look to buy stocks that are moving upwards even more aggressively. They lead the market higher and can provide room to grow. If the market drops down, it might make sense to short sell stocks. According to Benjamin Graham, the author of “The Intelligent Investor” and one of the world’s most notorious investors, “the investor’s chief problem – even his worst enemy – is likely to be himself”. It doesn’t mean that you are incapable of effective money management, but you should definitely check and analyse your investing approach in order not to fall into the trap of the familiarity bias, which is too common in trading.
Diversification: the ultimate remedyTraders who diversify are less likely to lose a significant portion of their investments just because a particular company doesn’t perform well. There are 3 major reasons to diversify that you should remember:
- Different types of investments perform differently at the same time.
- Diversification allows you to create a portfolio with a smaller risk than a combined risk of trading individual stocks.
- Different types of investments are differently affected by the world’s political and economic events, creating various investing opportunities.