One common mistake I’ve seen over the years in working with traders, especially new ones, is an attempt to trade everything and anything. A common thread that I found was that they believed that if their “job” was that of a trader then they needed to be trading. Not true! Trading isn’t the same as manual labor where if you’re not working the job doesn’t get done. Trading is about discipline and patience.
Discipline is needed to wait for the high percentage plays that WILL come your way and when they do, you pull the trigger. One of the greatest tools available to anyone is the watch list, yet few know how to properly use one. The easiest to manage are those of the electronic version and most brokerages have either a software or web based platform that includes a watch list function.
I’ve always taught that a watch list should be treated like a garden and that the soil will need to be prepared, seeds chosen for planting, water applied frequently and weeds to be removed as needed. To say the least, it’s not as easy to keep a good watch list as you might think. In fact, the most common excuse I hear is that there are too many stocks to look at and keep up with on a daily basis. Let’s break it down so you can see that it’s not that difficult.
The tilling of the soil is actually going out and using a scanning service to find the types of trade setups that work for you and your trading style. There are many great ones out there but I personally like to keep it simple and focus on a few highly probable setups.
- Ascending/Descending Triangles
- Bullish/Bearish Breakouts
I use the above mentioned setups because they fit my trading style and I like the odds of being successful. That doesn’t mean you should use the exact same scans. I don’t like tomatoes so I don’t plant them in my garden but I do like spinach. Point is, like the seeds you plant in a garden, look for setups that match your trading style. If you don’t like volatile stocks then stay away with stocks that have a beta over 1.5. If you prefer to be a longer-term investor then incorporate fundamental data. Perhaps a scan for moving average crosses is more your style, I don’t know and nobody really knows but you.
Take the time to invest in your future as a trader by looking at your watch list on a daily basis. Perhaps you can’t or don’t need to look at it daily but at the very least spend an hour on the weekend watering your potential trades. What good is a garden if it doesn’t get the water needed. So too is the watch list as you may have trades that setup and you miss them.
Managing your watch list is just like weeding a garden—if it doesn’t belong in there get it out. In other words, if the stock didn’t setup the way you thought it would, take it off of your watch list. If you’ve got 50 stocks on your watch list you should be more than willing to weed it out and only keep those stocks that have potential.
A few other suggestions that might help in developing and maintaining your watch list are diversification and exploration.
I remember one client of mine a few years ago from California. He came to my office and opened up his brokerage account and his whole portfolio was in real estate/ home builders. He was from a tech background and struggled with the fact that his portfolio was so “volatile” and I chuckled inside. I went on to explain that diversification is done for a reason and offered suggestions as to how to diversify his portfolio.
Use the different sectors and find out which ones the stocks in your watch list belong to. Don’t assume, verify! Get your feet wet and learn in the process as this knowledge will go a long way in helping you become a better trader. Grasp a better understanding of sector rotation and delve into macro economics a bit.
Take the time to explore and find new opportunities in the markets. You’ll eventually gravitate to the sectors and setups that match your trading style. The key is that if you work at it the journey to finding what works for you will be a shorter. Once there, you’ll have the ability to truly focus on managing both the trades your in and your watch list.