If there was one thing I learned during my career, it is that individual investors have a significant competitive advantage, but very few benefit from it. After my time with major brokerage firms, Dean Witter, AG Edwards, Smith Barney, and after starting Stock Traders Daily, I have come to realize one of my purposes. Through Stock Traders Daily I teach investors how to empower their competitive advantages, and in this column I will describe one of the most powerful ways I enable them to do that.
The objective is to make headway in any market environment, regardless of economic conditions, market direction, political turmoil, Europe, debt, or anything else, and without sacrificing time or lifestyle. Many people think this is impossible. Think again!
In this article I will describe a strategy that allows individual investors to achieve this goal using the tools already available to them through their online discount brokerage firm. Of course I will describe how we develop the plan, but all we do is place one conditional order per week, and almost every brokerage firm will allow you to use conditional orders.
I will explain how everyone can do this themselves, but for my clients I provide a plan, and all they need to do is place a conditional order based on the plan I give them. From there, they can go about their lives, work, play golf, or trade other stocks and feel comfortable that their risk is being controlled and they are positioning themselves to realize positive returns.
If I did not mention it yet, this strategy has integrated risk controls.
Typical of individual investors, I can anticipate excuses, so let me tackle another one before I continue. Our clients can get regT margin on their IRAs, which means they can have immediate access to the funds after they sell a position, so yet another restriction, excuse, reason for not controlling risk and empowering your competitive advantage, is lifted. Everyone can do this.
The Strategy is called The Stock of the Week.
1. Trade only one stock each week.
2. Define a plan and stick to it.
3. Begin every week in cash.
4. End every week in cash.
5. Refresh every weekend.
Ending every week in cash is extremely important. This has the same result as taking a nap after a long day at work. Ending every week in cash refreshes the mind, and allows you to approach the next week objectively, without lingering burdens. Interestingly, this process also allows you to enjoy your weekend. Too many times investors find themselves more consumed with the stock market when they should be present with family. Ending every week in cash serves multiple purposes; the most important may be that it can help you live a happier life.
The results of this strategy have been excellent, and for our clients the methodology of simply following the plan and placing a conditional order is as simple as it gets, but my intention is to teach you to fish so you do not need to rely on anyone to empower your competitive advantage in the future.
1. Develop a Focus List of Stocks that typically move with the market (I have 150 in my watch list)
2. Define support and resistance levels for these stocks (you can use a program to help)
3. Conduct an evaluation of the market every weekend (where is the market going next week).
4. Use your evaluation of the market to determine a bias. (ex. Market will test support and then turn higher again).
5. Filter the stocks in your Focus List for the ones that have the same bias as the one you developed for the market, and identify a handful that are poised to move with the market most efficiently based on that bias.
6. Review each of those few stocks to identify the one with the best plan for the week ahead. These should correlate with your already defined bias.
· Avoid penny stocks.
· Avoid stocks over $100.
· All stocks should be highly liquid.
· We prefer large cap stocks (they move with the market).
· Avoid stocks reporting earnings in the week ahead.
· Do not trade stocks expecting other important news (not always possible).
· Our model portfolio is $50K + margin.
After taking these steps a plan will have been separated from the rest (I offer an automated filter that does this but it can also be done manually). From there, simply take the plan and input that into your trading platform, then go to work, or do whatever it is that you prefer, and let the plan work for you while you go about your life.
Of course there is work that needs to be done in order to become truly proactive, to remove the burdens that weigh heavily on other investors, and to empower your competitive advantages, but once the framework is built (I have provided that here) it becomes mechanical, and that is what separates good investors from everyone else. It is possible, and you can do it.
Author: Thomas Kee – Stock Traders Daily