Tiger Woods has his golf clubs, Wonder Woman has her invisible jet, and Sammy Sosa has his trusty corked bat. All champions have their tools of the trade that they go to time and again to do what they do best- win. As traders, our watchlists and scanning tools get us what we want -- a bag of goodies that we intend to make money from. But how do you assemble a watchlist? How do you decide which securities to trade?
There are some traders that insist on trading a list of stocks over and over again. This is probably more prevalent when it comes to day-trading because many day traders become more familiar with the "personality" of their stocks and feel that it is advantage to trade the same stocks every day. When it comes to trading options, the best way to assemble a watchlist consists of the following:
The Details
Step 1 Details: In addition to testing indicators and systems, the best way to trade is to be as specific and systematic as possible. For example, your stock scan should yield a few, if not dozens of stocks that fit your criteria. You should put down on a sheet of paper (or word document) your method of choosing stocks once you look at the stocks that came up from the scan. This helps you remain as objective as possible when you are choosing from your scan list.
Step 2 Details: We use Trade Station or Trade Navigator software. Both programs allow you to set parameters for a trading system and sort out stocks with certain characteristics, including volume, price, and MACD crossovers for example.
We briefly mentioned that some day traders like to trade just a few stocks over and over again. This is ineffective in options. The best way to trade options is to use a scanning tool to find stocks that fit criteria that you know works. That really means that on any given day, the stock list can be full of stocks that you've never heard of! That's okay, because the truth is, the long term prospects of the company matter very little when you are talking about the short term holding period that is typical with option trading. So, you dont' need a small list to trade over and over gain. You don't even need to keep a watch list. Just use software to help you find the setups that you know work. The list can be different evey day.
Decisions Based on Reason and Data
Some readers have asked, "what do you do when the stock scan produces a stock that you have traded recently?" Most traders like to buy stocks that they made money on before and refuse to buy stocks that they lost money on before. The best way to decide on this s through system testing. In system testing, I found that some indicators worked best when the last 2 trades the system produced were losers. In other words, 2 losers in a row often happened right before a big up move in the stock.This is often due to emotional overeaction in the market place that eventually reversers (sometimes violently in your favor!) So your decision to enter trades with previous stocks should be based on systems testing.
All in all, the 2 most important ideas to remember are the following:
Be disciplined, and trade well!
Price Headley is the founder and chief analyst of BigTrends.com.