Part 2 – Steps 1 through 5
“Prediction is very difficult, especially about the future.”
Michael Covel in Trend Commandments, 2011
First, our thanks and a shout out to Patryk S. for asking for this series.
This is the second in a series of Tidbits explaining how I make investments. In Part One, I covered the steps I take before I even begin using the Trending Stocks platform. – John Duffy, CEO, Trending Stocks
As I have said before, pundits and others who provide stock market advice are generally well intentioned.
In most cases, they are making predictions about what they believe will happen or could happen with a specific stock and typically there are no consequences for them if they’re wrong.
However, I do recognize that they have experience and have done research or at least someone on their staff has done some research and I do not want to ignore that research.
And so, at the beginning of each year and quarterly thereafter, I quickly review their recommendations and add them to my Trending Stocks Watch List.
As a result, I generally have over 200 stocks in my Watch List. If you are interested in seeing my Watch List let us know (see button below) and I will send you a copy. It’s not a secret.
This Doesn’t mean that I will buy them, just that they may be worth looking at in the context of following the trends. I will explain how I use this list in Step 5.
Having made these selections for the Watch List in a calm, unemotional manner, I am ready to begin the process of identifying stocks to invest in.
I much prefer to invest when the Market condition is “Good”, but I am also prepared to invest when the Market condition is “Caution”. I just apply a little more caution to my selections.
Before we dive into the next steps, I want to let everyone know that investing is something that I do.
An important activity that I actively and mindfully engage in, but I am not a day trader and I am not glued to my computer screen throughout the day. I do have a life outside of investing.
Also, investing using the Trend Following strategy is slow and steady, as it should be.
As a result, I don’t typically make a lot of investment decisions in a year. And so, starting a new portfolio of $25,000 will typically take a couple of weeks or more to complete.
Then I only revisit my portfolio occasionally when a stock has stopped out or when I decide to sell.
I will be taking time to explain each step in some detail. In reality, it does not require much time to complete each step. It soon becomes second nature.
Steps 1 – 5 of my quick 12 steps to invest
- Step 1. The first thing I do after checking the Market Condition found on Today’s Report on our platform, is check the platform’s Sector Report. I’m always more comfortable investing in stocks from the best performing sectors, especially if the Market Condition is Caution. I’ve found that spreading my investments across three of four of the best preforming Sectors offers more opportunities and allows for diversification. However, since I always use Trailing Stops, I’m not opposed to over weighting one Sector if it’s doing really well, as is the Energy Sector today.
- Step 2. After I determine the Sector or Sectors that are performing well. I go to the platform’s Detailed Search to look for the best trending stocks in each of those Sectors. In doing so, I typically start by looking at the 20 day trend horizon to highlight those stocks that are doing the best over the past month. I also limit my search to a dollar range that I am comfortable investing. While my search includes all Trend Strengths, I do tend to focus on Trend Strength 1.
- Step 3. Now that I have a list of the stocks that are in the best performing Sectors and have met my other first pass criteria, I then look at the Icons on Today’s Report. The Icons are the Green, Amber or Red figures at the beginning of each stock report. If the Icon for a particular stock is Green, great. I’m ready to move forward. If the Icon is RED, I am not moving forward and no longer consider that stock. If the Icon is Amber, my caution level goes up. (See example of Today’s Report below) The conditions that effect the icons are highlighted in Bold Print, Volume and Volatility. If Volume is 500,000 shares traded or less, I do not proceed with that stock. Volatility is a little different, and we will discuss it later. At this point it is still a high level pass.
- Step 4. Armed with the stocks that passed Step 3, I go to the platform’s Graph function and look at the 200 day trend to see how the stocks have done over the past 10 months. What I hope to see is a nice steady climb to today’s high. What I am looking to avoid is a stock in recovery mode after a recent decline. I always prefer the steady climb. It reflects the fact that other investors (Retail or Institutional) consistently like the stock and are investing in it. I also don’t turn my back on stocks that have had a good 100 or 60 day run. I’m looking for good solid growth with very few, if any, spikes. I repeat the same process for each stock to identify a handful of potential investment opportunities.
- Step 5. I then run my Watch List. I want to see if any of its stocks are trending. If it also identifies a stock in one of the performing Sectors, that I already identified, I take that as another validation. I also look to see if the Watch List has identified any stocks with a Trend Strength of 2 or 3. I also consider that as a validation. After all Trend Strengths 1, 2 and 3 are just degrees on a Trend line. In addition, the Watch List often identifies other stocks that are worth consideration. And I do consider all those that pass the Graph test. I use multiple points of validation before making any buy decision.
Steps 1 to 5 happen quickly, because the first pass is a high-level look.
The next Tidbit will contain Steps 6-12. Again, if you would like to see my personal Watchlist, just send a message to email@example.com and I will send you a copy.
And remember Ride Those Winners and Cut Those Losses!
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