Analytics: Stock screens as a fundamental tool

It’s hard to tackle the huge amount of information available at our fingertips whenever we choose to trade stock. With so much available free, and so much being sold to us, how do we manage to get past our fear and finally commit to one position?

The stock screen is one important part.

There are few tools more important to the investor than the screen. It helps us define our strategy and find out stocks. It keeps us honest and it does most of the hard work for us. Most of all, it narrows the playing fields to the things we need to see.

There are many services that offer stock screeners on a subscription basis, and many of the screens are very useful. However, given the wealth of free screens online, it seems a waste to bypass them completely.

When you are setting up a custom screen, you want to aim for a reasonable amount of final results, probably no more than 200 stocks. You can try to narrow you results through the criteria, or just choose the highest scoring.

What criteria you select will depend heavily on your strategy: a long term strategy will look for low debt and good free cash flow while a momentum strategy will look at recent price gains. The beauty of creating your own screen is that it will help you define exactly where your strategy is going.

It’s important to not just blindly buy the stocks that come up after your screen. Look at them more closely (in both their financial statements and their charts). Remember, screens are a tool, but the real deciding factor is your own judgment—never let your tools take that away from you.

For more information on screens, check out this article by Jon Markman on MSN Money.

Education: The mighty pairs trade

I’ll be the first to admit I have no clue what direction the market is going in right now, but that doesn’t mean I want to sit out. No matter how crazy the economy on the whole is, some companies are strong, while others are weak. Just because the market can sink or raise both doesn’t men I should be completely afraid.

Enter pairs trading.

When you trade pairs, you are betting on two stocks in the same industry and sector at the same time: one that you think highly of you buy long while you go short (sell borrowed shares) on one you think is not long for this Earth. This works because you have both long and short positions, so if the market takes a tumble or makes a gain regardless of the economics of the stock, your two positions cancel out. In essence, their similarities make their differences safer to play.

Since the market can move stocks more than their own companies can (the last couple of weeks have shown that) this strategy can be a boon for traders looking to get some money back on the table without exposing themselves to much to mean old Mr. Market.

Just remember it is important to pairs trade with companies that are in very similar industries. You don’t want news that only affects one moving the stocks: it’s an all or nothing proposition.

If you want more information on pairs trading, check out Investopedia’s section on it.