Trade Selection

Trade Selection: Choosing what stock to trade and when to trade it is key to consistent trading success.

What to trade: Stick with market leaders.

Trade Selection suggests components of the S&P 500 index.

At first glance, it seems like such a daunting, overwhelming process. After all, just how many stocks are out there, anyway? Can we tell when a particular stock is poised to move? Is there an optimum time to act?

There are approximately 2,000 stocks listed on the NYSE, another 1,000 on the AMEX, and perhaps another 75,000 on the NASDAQ.

Fortunately, computers, being the incredibly fast idiots that they are, can sort them all out for us by whatever criteria we choose. However, Trade Selection demands that we trim the list down to some workable amount.

Also, keep in mind, not all stocks are alike when it comes to tradability. Some markets have depth and liquidity and accommodate large positions with ease. Others, lacking the same characteristics, are so thinly traded they seem to trade "by appointment only".

"Thin" markets are not only difficult when acquiring positions at favorable executions but they are absolute "nightmares" when it comes to liquidating positions. "Execution" is a good name for it!

Even the most liquid of market leaders "gap" unceremoniously when conditions are right, such as unexpected news, events, etc.

When to trade: Monitor changes in relative strength rankings.

Many investors won't make a move until they read the latest quarterly report. These are the "fundamentalists". They have to see everything confirmed in print.

The problem is not with the reports, but the timing. Financial statements, so carefully prepared by the company's auditors, are reporting past results and conditions.

When the reports come out for all to see, we know what everyone else knows. Knowing what everyone else knows is worth nothing! The market runs on future time.

There's an old saying, "If you see a Swiss banker jump out a window...follow him. He's probably going to make a fortune on the way down."

Big money tends to be smart money. They're in position to know things before the rest of us. That's just the way it is. No surprises there.

If you know how things are going, you don't have to wait for the reports. You know it's going to be good or bad and you act.

When enough money moves a market, enough to change its relative strength ranking, chances are "smart" money is doing the moving. And they're "fading" the market. They're selling into rising prices or buying into declining prices.

Conclusion: They must have their reasons.

Trade Selection dictum: It's not necessary to know what they know, in order to do what they do. As Nike says, "Just do it!"

Professional traders are constantly acting on imperfect information. If they wait until all information is known, the opportunity will be lost.

Optimum Time to Act:

The optimum BUYS of the year are, in my opinion, to be found among the 5 worst relative strength performers and the optimum SELLS among the 5 top performers if, as, and when they begin to change rank in the opposite direction.

Trade Selection: Like a good hunter, patience is not a virtue, it's a weapon.

Back to Market Timing

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