Stock Market Games - Choosing Stocks - Next Steps

So, now we have a good idea of the world and country economic picture, so stock market games trader what do we look at next in order to choose our stocks for our stock market games or trading. Next we look at the major indices of the markets we are proposing to trade to see how the broad market is trading - let's take a look and I'll explain the next few stages.

Stock Market Games - Major Indices

Each country will have an index which provides a measure of how the stock or share markets are performing. In the UK this is the FSTE 100 all share index, in the US it's the Dow Jones Industrial Average, in Canada its the S & P/TSX, and in Australia its the S & P/ ASX 200. Interestingly, the Australian exchange has a public stock market game that you can enter, so why not have a go there as well - I have included a link above. Each of these indices is constructed in much the same way from a basket of the largest companies in the exchange. The list of companies is generally reviewed on a regular basis with some falling out, and others joining as their value changes. The index is supposed to be representative of the market as companies are from a variety of markets and industries. So in order to establish a long term view on the index, we turn to technical analysis and view the index chart. We are looking for long term trends, support and resistance areas, turning points, and a view on the likely direction of the broad markets. Now when the market index falls or rises, not all the stocks or shares will follow, but generally the trend will be similar, so if the main index falls 100 points, then most stocks or shares will be down on the day. OK - so now we have some idea of where we think the markets may be heading longer term - what next?

Stock Market Games - Fundamental Sectors

Continuing our theme of drilling down into the data, we now move from the broad index, into studying the sectors of the market. Now every market will group its shares or stocks into sectors, and as I explained earlier, depending on the current state of the economy, some sectors will be performing well and others not so well. Clearly we would like our stocks and shares to be in those sectors which are performing well, and which look set to continue. To do this we use the fundamental approach and consider the broad economics of each. Try to think about national and international consumer and market issues. Think about the products and services you buy - are you buying more or less than last year? What products do you no longer buy. What are the economic trends - is manufacturing strong or weak, what about retail sales, is the cost of oil hurting the distribution sector, is the leisure industry booming or just surviving. Again, this is about common sense, reading, listening and often just your own observations and simple conclusions - there is nothing wrong with using your own intuition from what you see and hear every day.

Stock Market Games - Commodity Prices

The next area we look at is commodity prices, and in particular oil, iron ore, coal, copper, and gold. Now the reason for tracking commodity prices is twofold. Firstly we can identify stocks or shares in these markets which may be performing in line with the commodity itself. Secondly rising prices can feed through into the economy in higher retail prices, which in turn can add to inflationary pressure and possible higher interest rates. We now use our technical analysis skills to analyse the charts and draw some conclusions for the long term trends. Remember also that some commodities will have a greater effect on the economy than others - oil for example will have more of an effect than gold or iron ore.

Stock Market Games - End of Day Charts

Now this is not a requirement to play in the stock market games, but when you trade in the real markets you will need a good end of day charting package. My own preference is Sharescope which I have used for many years. They do offer a 30 day demo account which is free, so please do try it so that you can follow the remainder of my stock selection strategy. ( I do not recommend a live data feed or level 2 data, as this is a waste of money in my view). OK, so you've downloaded the charts - what do I do next?

First I go through each stock chart and plot it against the major index which is easy using the above package. So each stock will have it's own price chart plotted against the main index, so in the UK we would use the FTSE 100, and in the US, the Dow 30 etc. What this tells us is whether the stock tends to follow the trend of the index. We are essentially looking for those that do, and also outperform it, since we are going to be basing our decisions on the broad market. However, if we do find a stock that moves in the opposite direction, then this can provide us with either a hedging opportunity should markets fall, or a stock to buy if we think markets are going to fall. It goes without saying, but I will say it anyway - we are obviously only looking for stocks or shares in a long term up trend as we are not interested in picking bottoms or buying what we thinks are cheap stocks which could rebound. Just look for stocks which are moving slowly and solidly in an upwards direction ONLY!!

OK - let's go on to the next stage and remember you can use this strategy in choosing your stocks in the stock market games.

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