Lessons On Buying Stocks

How To Select The Right Stocks At The Right Time


The seven lessons in this course explain the characteristics of successful stocks and the forces that push them up. The first seven lessons explain specific traits to look for when buying stocks.

5) Find the Leaders

The stocks outperforming the market tend to continue performing well, while lagging stocks are likely to remain underperformers. Here, you'll see why this is an important lesson for investors and how to identify the leading stocks.

Stocks that are doing well, tend to keep doing well.

How many times have you concluded that a stock's best days are behind it, only to watch it soar as you stand on the sidelines? This assumption has often come back to haunt investors. In reality, the stocks that are doing well, tend to keep doing well, while those slumping will, in all likelihood, continue to do poorly. Why? Well-performing companies manifest their strength through superior performance in terms of earnings, sales, profit margins and, yes, even the performance of their stock.

  • Choose the leaders (even at a higher price)
  • Ignore the laggards (even if they are available cheap)

A study of the greatest stock market winners found that all-star stocks had, on average, outperformed 87% of the market before they began their most dramatic price advances. In other words, they were already in leadership positions. This concept is contrary to the popular bargain-hunting mentality, but is based on historical facts.

Use the StockAxis Technical Rating to identify today's leaders.

If you want to find next year's winning stocks, look at the better-performing stocks today. Remember, the biggest winning stocks historically have been, on average, in the top 13% of stocks at the time they began their major advances. To help you identify today's leaders, we have developed the Technical Rating. This rating compares the price performance of each stock over the last 12 months, with extra emphasis on the six most recent months. Stocks are rated on a scale of 1 to 99, with 99 representing the top 1% in terms of price movement. So a Technical Rating of 85 means that stock is outperforming 85% of all stocks in terms of price performance.

A good starting point for stock selection is identifying the top two or three stocks with the highest Technical Rating in an industry group that's leading the overall market.

Following StockAxis’ Technical Rating, consider for investment stocks with its rating of 80 or higher.

Any stock worth considering should have a Technical Rating of 80 or higher. This way, you're concentrating on the top 20% of price performers. In fact, the most successful stock selections generally have Technical Ratings of 90 or higher just before breaking out of their first or second base structure.

Any stock below a Technical rating of 70 is not in leadership territory. If you consider any stock with a Technical Rating of less than 70, keep in mind that you're automatically ruling out the top 30% of the market. It's possible that these stocks will still go up, but it's more likely they'll have only lacklustre performance. Bottom fishers, those investors looking for a bargain among down-and-out stocks, are tempted to buy stocks with low ratings. But history proves that the most powerful stocks have shown prior strength and aren't rebounding from last place.

It's best when the relative strength line moves up at a sharp angle, showing the stock is outperforming the market. A line moving down indicates the opposite: a weakening stock. The relative strength line offers other clues:

  • It's a positive sign when the line begins moving higher before the stock price itself does. A rising line indicates underlying strength in a stock; frequently, it's just a matter of time until the price itself begins moving higher.
  • If a stock's line stays on an uptrend, that's positive. It shows the stock is keeping ahead of the overall market, acting as a confirmation of the stock's uptrend.
  • If a stock's relative strength line fails to follow along with a new high in price, that's a warning signal. This shows the overall market is moving up faster than the stock. This may signal the stock is weakening, though the price may not reflect it immediately.

Relative strength lines that start drifting lower over a period of time, even if prices remain steady, indicate the stock is weakening. This also shows the stock is slipping in comparison with the rest of the market.

Another common temptation among investors is to seek out stocks that resemble leading stocks in terms of having similar products or services, but are trading at lower prices than the leaders. You're better off sticking with the leader of the industry, even if its share price is higher. Take the IT industry. Wipro, after the 2000 crash, fell about 90% from the peak of Rs. 1700; the price of the stock was only about Rs.350 in early 2008 after 8 years of the crash. On the other hand, infosys made a new high and rallied higher sending its stock price up during the same span of time. This is not a rare example, for any industry. The moral: stick with the leading stocks in a leading industry group.

No investor should pick stocks based on a single factor. You must weigh the full picture, including a company's earnings, industry group performance, institutional sponsorship and chart patterns. (Institutional sponsorship, chart patterns and other important elements will be explained in detail in subsequent lessons).

  • Relative Price Strength Rating measures a stock's price move over the last 12 months compared to all other stocks.
  • Look for stocks with high Relative Strength. The better-performing stocks tend to go higher, while the lagging stocks tend to lag even more.
  • The Relative Strength line helps confirm a stock's upward price movement. You want to see the RS line moving in a strong uptrend.

Leave a comment

11 Comments


Shrirang
Jul 31, 2018 at 02:06 Reply

Dear sir/mam Is Relative strength line means RSI in charting tool. If differ where it to find it. Thanks Shrirang


Team StockAxis
Jul 31, 2018 at 05:12

Dear Shrirang,

Yes, Sir, RSI is Relative Strenght Index.

Regards,
Team Stockaxis


Mohan Ram Cirumyloor
Jul 29, 2018 at 07:57 Reply

One more point, the RSI above 85% indicates over bought and stock price may reverse. You say that we look for strong RSI movement and how long the price stay above 85%.


Ankitkumar Chheda
Aug 11, 2018 at 05:48

RSI & Stochastic are momentum indicators. They relate the current price with recent period (which we set in the indictor, by default it is 14). Generally I use 0 to 40 are Good momentum for DOWNTRENDINg stocks, 40-60 neutral & 60-100 as Good Momentum for UPTRENDING stocks. try to analyse the formula used to make these momentum indictors (viz. RSI & Stochastic)


Team StockAxis
Aug 01, 2018 at 11:50

Dear Mohan Ram Cirumyloor,

RSI crossing 70 - 80 always does not imply overbought conditions. This is a common myth among retail investors that if RSI crosses 7 - 80 levels than it has to come down immediately, it can even sustain in that zone for a long period. High growth driven stocks (stocks that are posting great number ex: Nestle, Bajaj finance, Britannia, Page Industries, Avenue Supermart). RSI, however, is not the only concluding factor in deciding to invest in the stock.

Regards,
Team Stockaxis


Kanagasabapathy
Jul 29, 2018 at 07:28 Reply

Your today's lesson is very worth.Request to add some examples for Relative strength Line along with some graphics etc.,Thanks so good.


Team StockAxis
Jul 30, 2018 at 10:56

Dear Kanagasabapathy,

Thank you for the appreciation, Sir. We have noted your request and will surely try to come up with some RSI examples.

Regards,
Team Stockaxis


Kantilal k shah
Jul 28, 2018 at 06:33 Reply

Your lessons are very informative . Thanks


Team StockAxis
Jul 30, 2018 at 10:27

Dear Kantilal k shah,

We Thank you for your appreciation, Sir.

Regards,
Team Stockaxis


Pramod m.modi
Jul 28, 2018 at 01:43 Reply

Good


Team StockAxis
Jul 30, 2018 at 10:19

Dear Pramod m.modi,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Regards,
Team Stockaxis


Suryakant Pataskar
Jul 28, 2018 at 12:18 Reply

Very useful for investors like me I learn many things about stocks I would appreciate lessons on technical analysis and balance sheet once again thanks


Team StockAxis
Jul 30, 2018 at 10:19

Dear Suryakant Pataskar,

We are happy that we could understand the stock market better. We have noted your request and will certainly try to come up with lessons on it.

We recommend you to also read the following blogs.

Use The P/E Ratio Smartly!

Regards,
Team Stockaxis


jayawant patil
Jul 28, 2018 at 11:48 Reply

OSAM!VERY INFORMATIVE!!


Team StockAxis
Jul 30, 2018 at 10:16

Dear jayawant patil,

We thank you for your comments, Sir.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


SAIFUDDIN VORA
Jul 28, 2018 at 11:46 Reply

Very Good advice


Team StockAxis
Jul 30, 2018 at 10:15

Dear SAIFUDDIN VORA,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Shriram Shahane
Jul 22, 2018 at 06:27 Reply

Very good initiative ! Many people need to get this information!! This is also nothing but service to society!! CSR is nothing different than this. I don’t think while putting all thoughts in lesson format u have kept Aces with you Thank you..


Team StockAxis
Jul 25, 2018 at 11:01

Dear Shriram Shahane ,

Thank you Sir for your kind words. This motivates us to keep educating our clients with the best market practices. We promise to keep coming up with such articles to help investors keep up with the market trend.

We recommend you to also read following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Murari Lal Jaiswal
Jul 21, 2018 at 06:22 Reply

This is a genius of investment thought. Thank you so much.


Team StockAxis
Jul 25, 2018 at 10:58

Dear Murari Lal Jaiswal,

Thank you for visiting us and believing in us!

We recommend you to also read following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

5 Rules to Deal With a Volatile Market

Regards,
Team Stockaxis