Maintaining a Disciplined Strategy for Your Trading

Scan, Watch & Trade… sounds simple enough, right? Today in our webinar on “Back to the Basics of Trading” we discussed the importance of having a defined strategy to manage your money. For the last twenty years we have been scanning the market for the leading sectors. The simple game of follow the leaders has always worked well. Over the last two weeks the broad markets have been putting in a short term low and bouncing back towards the previous high. When the low is established scanning for the leadership is key for pointing you in the right direction to find opportunities for trading short term. Those scans turned up three sectors worthy of our attention. Financials, Technology and Healthcare were the first to lead off the low. Thus, we added them to our watch list for possible entry points. The point of this activity is to keep the process simple (KISS). There are numerous software packages today that allow you to run these simple scans and find the leadership.

Once the watch list is established we can then dig further into the sectors for sub-sectors or stocks leading the way higher. In the case of financials (XLF) the leadership was coming from the brokers (IAI). Thus, adding it to the watch list for opportunities was simple enough. In technology (XLK) the leadership came from semiconductors (SOXX) and internet companies (FDN), and we added them to the watch list. Healthcare (XLV) leadership was in the biotech (IBB) stocks and it was added to the watch list as well. To take this one step further we could scan the holdings of each ETF and look for the leading stocks and add them to the watch list if we so desired. Again this is a simple enough process, and with software, easy to perform in a short period of time.

The next step in the process would be to define the entry point to put the trade into our portfolio. Based on our strategy for the trade, whether technical, fundamental or quantitative we can define where we want to buy the ETF or stock. Thus, we will define the entry, the stop and the target on each potential play. This allows us to evaluate the risk of the trade as well as the potential time frame for holding the position. In this simple process we have defined the process for scanning the sectors, building a watch list including the entry, stop and target of each potential position posted to the list, and when the entry points are hit we trade into the positions and establish our stop as we go forward.

Taking the above example of the bounce off the recent low, you would have established a list of ETFs to watch with a predefined entry point for each. You would have established positions in each of the above sectors and sub-sectors and you would be participating in the upside swing now in motion. You would have a stop that is established and adjusted as the positions move higher. The key is to define a strategy you can implement with confidence and ease of management.

The challenge for many traders/investors is a lack of a plan or strategy for investing or trading our money. Without a disciplined strategy in place we will be subject to every emotion or reaction possible. It is important as a trader to manage your risk with a defined strategy to implement when putting your money at risk in the markets.

If you have not had to opportunity to join us for our four part webinar series on “Back to the Basics of Trading” simply follow the link and sign up for next weeks Webinar on Tuesday September 17th. Hope to see you there.