#2: Identify and Follow Market Leaders
Not putting all your “eggs” in one basket is one thing.
But how do you know if that basket’s built to last?
Sure, you can get your friend’s or even your dog’s opinion, but how can you be so sure?
You can’t blame them if that basket turned out to be crap since it’s you who makes the final call, right?
It’s the same thing with stocks.
How can you repeatedly and objectively look for “good” stocks to trade without relying on someone else’s opinions?
You guessed it!
There are many ways on how you could use a stock screener as the combinations are endless.
At the same time, we’re not here to mix and match screener settings that don’t make sense.
That’s why we’ll use a time and tested principle from William O’ Neil’s book:
“What seems too high in price and risky to the majority usually goes higher, and what seems low and cheap usually goes lower.”
Imagine seeing a stock that’s consistently performing so well despite a stock market correction…
Now that’s something.
So to put this into action, here are two filter settings that can quantify and represent this principle:
- 52-week highs
- Rate of change
Let me show you how to apply and use them.
Based on a historical backtest study, your chances of losing money decreases as time goes on whenever you trade stocks at their 52-week highs.
I’m sure most stock screeners have this setting.
However, feel free to use this setting on a free stock screener called finviz.
Now, if you want more flexibility in looking for market leaders below 52 weeks, you can consider the rate of change.
Rate of change
The rate of change determines how fast a stock has moved further in price given a certain amount of period.
The best part?
You can modify how far you want to go!
It means that if you want to look for stock market leaders within the last three months, then you have the freedom to change the settings and use the 12-week rate of change period.
Why is this important?
Well, if you trade the lower timeframes, then waiting for a 52-week high would be irrelevant.
So you’d want more flexibility on which tools to use.
Nonetheless, if you are currently using the ThinkorSwim platform, you can filter your screener results using the 50-week rate of change:
Now that you’ve set up your screener and hit scan, what’s next?
What should you do now?
Let me tell you…
Rank and prioritize
Let’s go back to the results you had:
Since you’re screening for market leaders, you’d want to pick leaders as well.
So if you’ve found trading setups on TSLA, MRNA, and MSFT.
Then you want to make sure that you prioritize entering TSLA first, MRNA second, and so on.
But to make myself clear…
You want to make sure that they meet your trading strategy’s rules first before you enter the trade and not enter each stock immediately based on the screener’s results!
With that out of the way…
We’ll now be honing into the nitty-gritty details on how you can manage your trades, now that you have a bird’s eye view on how to manage your portfolio.
Don’t miss this.
So go to the bathroom, drink a glass of water, and keep reading.