Welcome!
The importance of having a fresh watchlist.
Imagine that you have a fleet of boats, some boats are at the dock and some are on the ocean.
Boats on the docking area it’s your watchlist.
Boats on an ocean mission are your live positions.
When one boat comes back to the dock from the mission (closing a position) you need to have a fleet of boats ready to go into another mission (opening a position).
On your dock, you need to have different types of boats. Boats that are good in different environmental conditions. They need to be kept in a good condition, some of them need to be retired and replaced with fresh ones.
These are the boats that will ensure that your next mission will be successful. Use the best boat for the expected environmental (market) conditions.
Why is this important?
On the technical side, it’s very simple.
Let’s say you have a portfolio of 10 positions, 5 longs / 5 shorts. You need to close 4 of them to take the profit, or to cut some losing trades. Now you have 6 positions in your portfolio.
What do you do next?
I tell you what most people do in this situation. They remember the last stock that is discussed on TV or on the internet, they will look briefly at the chart and then open a position. I do not need to explain why this is bad decision-making.
You need to plan your next moves, do not be a reactionary trader. Plan your moves ahead of time. Keep in mind that I am not suggesting to be rigid.
Now that we know what not to do, let’s have a framework that will help us make good decisions.
Now let’s say we have the same portfolio with 10 positions, 5 longs / 5 shorts, but we also have a watchlist of 10 - 15 stocks. We need to close 4 positions, we are left with 6 positions live in our portfolio, basically, the same situation as explained above.
Now the big difference in this scenario is that now we have 10 - 15 stocks to choose from to add to our live portfolio.
This is how we plan ahead, we know that this scenario will happen so we keep our watchlist fresh and up to date.
Your watchlist should be built by doing research (Quantitative + Qualitative analysis) about the stocks and the industries that they are in. You need to have longs and shorts on your watchlist.
Do not put stocks on your watchlist only to have a watchlist. If you do not do the research then, this watchlist it’s just a list of random stocks. Do it right.
Basically, the process should be as follow:
Came up with a trade idea
Do the research (this will be easier and less time consuming with more experience)
Put the stock/stocks on your watchlist
When you consider that the time is right, open a position
Watchlist as a filtering mechanism
Your watchlist will work as a filtering mechanism. How?
Most people:
completed the research for a stock
open a position in that stock
We:
completed the research for a stock
put that stock on the watchlist
Putting the stock on the watchlist instead of opening a position, it’s a big difference.
We wait for the right time to put the position on. When we think that the risk/reward proposition is right then we execute. When your stock it’s on your watchlist use TA (technical analysts), to help you put the risk/reward in your favor. Just to be clear we use TA only after we made the fundamental analysis, do not do this in reverse!
Now let’s imagine that you have a trade idea you put it on the watchlist, but the stock does not move in the direction that you intended. After some time you need to remove this stock from your watchlist, basically, for some reason, your trade idea does not start to develop. Now you can see how you saved money by filtering out bad ideas.
Keeping your watchlist fresh and up to date it’s very important, do not underestimate this process. The stocks from the watchlist, at some point, will be live positions in your portfolio, so take this process seriously.
Do not make your watchlist full of stocks from the same Sector/Industry, keep it diversified. Make it based on your future market expectations, have multi scenarios in mind.
You can see how our watchlist helps us to stay in motion and not open a position in some random stock.
Use your stocks from your watchlist at the right time.
But when is the right time? The “right time“ does not exist.
Now, to be honest, this cannot be taught because it’s based on the situation. The “right time“ it’s an approximation. It’s the “right time“ when you consider you have significantly more upside than downside. Only with experience, the ability to see the situation clearly will improve.
Conclusion
As you probably conclude after reading this, building and keeping a watchlist fresh it’s a necessary continuous process.
After you build it, you just need to keep it fresh and up to date. Now we are in a good position to take advantage of the opportunities that will appear.
Your boats will have a successful mission.
Be well.