Manage Your Watch List To Support Your Stock Trading System
Jan 14th, 2010
Does your watch list look like a weather map? You know: highs over Cleveland one day with all the focus on iron ore. And then the next day Cleveland has disappeared. Iron ore has gone rusty and the focus is high pressure in the Pacific and shipping companies. Watch lists are supposed to be interesting; but how much should they just blow with the prevailing wind? If you use a stock trading system based on a watch list that changes like the weather; have you created a stable base for a profitable stock trading system?
We ask this question because our watch list grows routinely to twenty five or thirty stocks. It is only limited by the vertical space on our computer screen. Taking note of this phenomenon; we wonder if a little discipline might improve our stock trading account performance. A large number of stocks does not fit our budget or mental capacity. To “solve” the problem of a tall watch list we simply culled the list to maybe fifteen stocks….. and then created another list. Three lists of fifteen beats a single list of thirty right? Maybe not. In a world that is divided into folders and folders in folders, the “solution” of adding ever more divisions seems natural. But, sooner or later, we must step back and ask ourselves whether or not a simple stock trading watch list might lead to a simple stock trading system and coincidentally lead to more profitable trading.
OK. We recognize that the universe of stocks offers thousands of stock trading possibilities. You have seen today’s high pressure area become tomorrow’s even higher pressure area. We have to respect momentum. And momentum is fun. Stock price momentum leads to long watch lists and probably at least a few profitable stock trades. Watch TV you will hear many traders talking about and following stock price momentum. There is no question that following a trend is a sound stock trading principle. The common wall street saying is “the trend is your friend.” I think some pundits add “..until it’s not.”
We’re a little off the subject or our watch list How the TV traders manage to watch a new stock every day is a question for another post. We are pretty certain that a very long watch list or several slightly smaller lists of potential stock trades only produces only minute-by-minute data on the change in a stock price from the open of trading. The data alone does not contain much usable information. We enjoy the “riding the wave” approach to stock trading. (Figuratively speaking of course. We have only seen and not touched surfboards.). But, this minute-by-minute data generates kind of a frenetic mindset. That self-imposed atmosphere turns out to be essentially at odds with our own mental tendency. The feeling that something is missing occurs naturally everywhere in life. When this feeling crops up in your stock trading system, the time to ask some questions has come. We ask the question by writing aloud. And to try to find an answer we are going to try two disciplines in our watch list Hopefully these watch list restrictions will support a better and more comfortable stock trading system.
We plan to limit our potential stock trading list to ten stocks and treat our watch list like a portfolio. The stodgy discipline of knowing something about your equity investments is a widely suggested and respected approach to owning equities. So we will focus our stock trading system and concurrently our stock buy watch list. We will visit the websites of our watch list companies and learn a little about how they make money and we will learn a little about events and external factors that move the stock price. We will know our target price to buy stock or sell stock. We will set our own anticipated market movements. This discipline will severely restrict the free-wheeling approach to watch listing numerous potential stock buys. We think a little stock trading discipline is in order. To continue the weather analogy, dressing for the weather you anticipate requires anticipatory thought and the weather provides immediate feedback on your choice of weather gear.
We would state our second principle used to create our watch list, for lack of a better term, as “pick your poison.” Here, your watch list may legitimately diverge from a true investment portfolio approach. We must still watch stocks that we are interested in owning. But, we suggest that the investment idea of a diversified portfolio may not be a necessary or important goal for your stock trading watch list Your trading account should by nature be limited and focused and, most likely represents the highest risk portion of your total assets. Diversification for the watch list is out. What’s in?
We will try to make a list of potential stock purchases that reflects and supports an overall stock trading system, not a stock investment system. Some approaches to a limited stock buy list might include: 1) a list with stocks from ten different industry groups 2) ten stocks from one industry group and 3) you guessed it – some stocks from selected industry groups.
We could find opportunities for stock trade profits in a more-or-less diversified watch list, which includes one stocks from ten industry groups. If banking heats up our single bank stock will probably follow the industry price rise. Probably. There lies a problem in approach 1). You must select one decent stock in each of ten industry groups. Given one choice, do you pick Bank of America, Goldman Sachs, a small Midwest bank. We might do well knowing something about our one banking stock, but this idea feels like too much diversification for a stock trading watch list
The idea of picking one industry on which to concentrate, approach 2), has the problem listed above for selecting a single stock purchase in ten different industries. What if our industry is a dud? We probably would not pick utilities for a stock trading watch list; but should we pick technology over materials? We want to pick an industry group or sector with some action. On the positive side, if you know your ten stocks in one industry you might be able to pick winners against losers. If you short stocks, (we cannot and do not), good luck. You are no beginner and you have more than some simple stock trading approach. Some professional stock traders recommend, and presumably execute, paired stock trades. That trade consists of a buy stock in one company and a sell stock in another company or index. Since we are not shorting stock we leave that kind of industry focus and analysis to the professionals. Here’s the approach we will try.
Finally, we come to today’s idea of inflicting some discipline on our stock trading system. We want a little industry diversification and we want a little potential stock buy diversification. We will pick three trading stocks from three industries for our watch list Hopefully we will find a stock trading watch list that we can live with.
Whatever your approach, create your watch list with a real- money stock trading system in mind.