1. The totality of the Basket is what counts, more so than the outlook for any one stock. To put it another way, do the 5 stocks play well together? This takes lookback analysis, where you combine different groups of stocks and look at performance across a span of days. If you've got days when 2 super-performers are up but 3 other super-performers are down, that's a bad Basket- it's upside-down! So you substitute until you get a batch that's consistently at least 3 above water.
2. Technical Analysis is less relevant than you might think. Generally, you're buying today near Close and selling tomorrow as high as you can. So what you're really concerned about is tomorrow's upper wicks in relation to today's Close, not whether the stock per se is going to go up tomorrow. So you see it's possible to profit in many stocks, even when they go down. You can do this by eyeball or use heavy-duty programming like we do, since only a handful of stocks give you the right kinds of gains with this method. So the use of TA is mainly during trading tomorrow.
3. As a Basket Trader, you are not trying to maximize gain on any one stock. Most of us are trained to maximize single stocks, but that's just not helpful in Basket Trading. What you want, technically, is a fixed percentage gain overall, say 5-8% on low priced stocks, and less on high priced stocks. Remember, with 5 stocks in your basket, a further gain of, say, 10%, in any one stock is really only a 2% gain for the Basket. So why wait around and stress yourself for the extra 2% and meanwhile risk that the one stock will go against you?
What is it? No, really, what is it?
Important Note: We use Robinhood.com for Basket Trading because there are zero broker fees. We are not otherwise affiliated with them.
First of all, Basket Trading is not just grabbing 5 "likely to go up" stocks and trading them all at once. There's actually art and science behind the selection process. Second, there are profound financial and psychological differences between normal trading and Basket Trading. Read more at right, left and below...
Money Management Differences
1. Technically, you're laying off risk. Most financial experts will tell you to risk no more than 5% of your available capital, right? We aren't going to tell you different and then you lose your house or something and blame us. So please do your own personal risk assessment. But our view is that small traders, if they're going to make money, really have no choice but to risk a lot more than 5%, and many really need to go "all in" on every trade. Basket Trading lets you do that. This assumes that you have some skill in stock selection for your basket. So if you're right on 2 or 3 of those stocks, you'll make money or break even. An important key is knowing when to kill a trade. We use algorithms to tell us that but you'll probably use TA. Our algos give us an average gain level and range for each stock in the Basket, so during trading we rarely even look at TA.
2. Reserve capital. It's a good idea to split your risk capital into 6 pieces, especially starting out in Basket Trading. Five pieces buy the stocks; the sixth piece is for "averaging down" on a stock you held too long (you'll quickly learn to break this nasty habit, guaranteed).
Bottom line, basket trading is probability trading. You live with the Devil. And most of the time you can whip his whatnots sideways.
~~D. Hudson, OrangeQuant
You must learn to KILL any RATS without mercy. No matter what you think of them, any stock that drops more than 2% from your entry must be killed immediately.
1. The Basket Trader is more relaxed. This is due to the fact that no single stock is a "make or break" proposition. You can actually afford to lose 5 or even 10% on one stock and laugh it off.
2. The Basket Trader is quicker to kill a loser than a regular trader is. Basket Traders are not married to any one stock, or to the idea of being "right" about any one stock. Basket gain is what's important. That's why we're called RatKillers.
3. If a basket goes underwater, the Basket Trader is more likely to kill everything in sight and not even feel bad about it. That's because the Basket Trading strategy is compounding of risk capital, so the day's loss can quickly be made up.
4. At first, it's hard to watch 5 stocks at once. This is stressful, but you get used to it and soon it doesn't bother you at all. We built a little widget that tells us what's going on in percent terms for each stock and an average of all 5 stocks, all at that instant. It fits in a small space, and each stock has its own color. See it below. Send us a note and we'll send it to you for free- but you need a Thinkorswim platform (TD Ameritrade) to use it- the demo platform will work but since there's no minimum to open a real account, you may as well, since that gives you many other uses (we are not affiliated with TDA, other than having an account with them).