Concentrated Effort - The Financial Markets - Your Watch List
The German-born American architect Ludwig Mies van der Rohe is attributed with coining the phrase "less is more." This is a fact that I was unaware of until I Googled it as I had always attributed this saying to my art history teacher my freshman year of college. I only remember two things from that class. The first thing was wondering whether the state required professors to use the saying less is more a requisite number of times each class period. The second thing I remember is the exaggerated manner in which the professor separated his hands as he slowly emphasized the words less and more. It was as if 18 and 19 year olds needed a visual depiction of what the concepts less and more actually were. Needless to say, I did poorly in that class.
Sometimes the lessons parents, professors, and others try and teach us take years to sink in. Decades later I must apologize to my professor as I have come to realize that 18 and 19 year olds actually do need visual depictions for just about anything to sink in. The years have also taught me to believe in the concept of less is more. While this has varied meaning in my life, it perhaps has no better practical application then how I manage my financial market watch list.
The Watch List
For those new to or just beginning in the financial markets, your watch list is how you organize the stocks you follow. Ideally, you put stocks that interest you on your list and periodically check them (anywhere from multiple times a day to weekly depending on the type of trader you are) to see if trade setups have occurred that would warrant you entering the trade. Most good financial market software programs will have some sort of program that allows you to create and manage this list. These programs ideally allow you to click or double click on the stock you are following and pull up the chart to perform whatever technical analysis you need to do.
So ideally your watch list is a comprehensive list of stocks that you follow and check systematically in order to easily identify trade setups that may occur. In practice, watch lists often become a jumbled mess of symbols and numbers whose creators often stare at for minutes in a lost haze. I know several traders, who have tremendous skill in analyzing market data, whose watch lists are comprised of hundreds, if not thousands of stocks. When I run into them and they have their laptops handy, they often stare blankly at their own lists trying to remember where anything is. When they do talk on a stock, there is oftentimes a depth lacking in the conversation. These traders are perhaps hindering their earning ability by not applying the principle of less is more to their own data management.
I know other traders, very successful ones, who do very well for themselves by simply trading a few stocks. For the novice it may seem counterintuitive that a trader can succeed by only trading a handful of stocks. After all, there are thousands of stocks and wouldn't knowledge of as many stocks as possible maximize your chance of finding proper trade setups? The advantage these traders have is that they know their stocks intimately. Successful traders that trade only a handful of stocks rarely need to even look at their charts to talk about the short, intermediate, and long-term trends of the stock in question. They can tell you where support and resistance points are, potential trade setups that may occur, and how the stock is performing against its sector and larger market.
This in-depth knowledge also frees up time for traders to pursue other interests, either on a professional or personal level. Some traders get so caught up in the pure volume of trading that it can engulf their lives. I promise you if all you want to do is search stock after stock looking at potential trade setups, there is plenty of information for you to do that. Most of us want to use the financial markets to pursue other interests. Having a manageable watch list of stocks that we are very familiar with allows us to enter the trades we do enter with confidence. There is no prize or bonus money for those that have hundreds of stocks on their watch list. I could make a very strong argument that having that large of a list leaves you susceptible to worse trades and falling prey to information overload.
Your Watch List - How Big and Where to Start?
There is no universally correct size to your watch list. There are numerous variables that you the trader bring to the table with your personal and professional commitments; however, the following is a good guide on how to start and build your list:
1) Start out with one stock. Before you move on become well acquainted with that stock. What have the trends been? Learn its various support and resistance levels. How has it performed against the larger market and sector it is in? When is its earnings? Identify activity before and after its last few earnings.
These are just a few things you can do to become acquainted with the stock. As you become familiar with trade setups and entry points, you will start to indentify historically when these occurred on this stock. It can take surprisingly very little time to gain a solid background on the technical history of any given stock. With a touch of experience you will be able to identify the high probability trade setups that occur with your stock and make your first trade.
2) Build slowly. Slowly is obviously a relative term as someone may consider one stock a week too much and others want to add one an hour. Just remember less is more in this area, and we don't ever want to be the trader with a 1,000 stocks on their watch list.
3) Build until you feel uncomfortable and then pull back one. We should always strive to maximize our potential. We are not striving to be lazy traders. But if we reach that point where we feel like we can't keep on top of the stocks on our list, don't be afraid to pull one or two off your list. If you feel on top of things, then add one or two back—your watch list should never be static. Adjust with the events in your life and keep the number flexible.
Limited capital and time make an overly cumbersome watch list just plain dumb. Apply the principle less is more to your watch list and you may find that the quality of your trades go up. You may also feel more in control and enjoy trading more. One can never discount the benefits of a sound psychological state when trading.