Now we’re getting down to it. This is the section that you want to read and reread and put into practice. Well, you want to be sure that you are familiar first with all the concepts and indicators that I have mentioned. You may notice that there are a lot more indicators available on any graphing software you have, that I don’t use. That’s because I don’t like to make things more complicated than they need to be. I think some people feel they have to justify their jobs by creating ever more complex tools, which you almost need to be a mathematician to use.
You know the problem with these? They are developed and honed using historic data – of course, because that’s all we have – which doesn’t mean that they will perform in the future; and if you can’t understand them, they just might be worse than useless. There is no holy grail of the trader, and, surprise, you will find some stocks go the opposite way to that which you predict and expect. To be successful, you have to pick the right stocks, and you also need to be sure that you have good exit strategies in place.
So how do you find the trades that you want to make? In your scanning for stocks to trade, you should try to restrict yourself to the major indices, and start with the FTSE100 until you think you can cope with more. I like to trade end of day values (EOD) as I like to have a life, and I recommend that you at least start with this.
Get yourself set up to sort through the ones that you are watching by having three lists, or folders if you are using Trade Focus, that allow you to separate the stocks you are considering.
The first stage, and you will have a folder for this, is where you keep a note of the shares that you are looking at. This is your big list, all the shares that you have charted and that you want to follow. Anything that you think looks interesting you can put through to the next folder for a closer look.
The second folder is where we get down to it. This is our working folder; I call it Second Stage Selection, where we decide what stocks from the first folder really are looking interesting to us. Taking a closer look at the ones we put into the first folder, and having a look at the trend and the indicators, we can move those that appear to be trending, or moving in an interesting way into the second folder. The idea is that the second folder will contain stocks that are candidates for selection for trading, but they may not be at the point where we should place a trade yet. We can see, using the techniques that I am covering, which stocks are worth following and which are not. We can also decide which one of the techniques we could use to trade that stock. The stocks that qualify for trading we can advance to the final folder, which we call Trading. The Trading folder is where we put the details of all the stocks in which we are actually taking a position, whether it’s long or short.
Why do I use three folders, instead of just picking the trades as I go through? Because I want to keep an eye on those stocks that didn’t make the cut, and ad-just between the folders depending on performance – I will want to downgrade a Trading folder stock when I decide to exit the trade, or bring up to trade a stock that has now got to the right pattern – maybe the stock price has just crossed the SMA, and other factors point to a trade.