Thursday, July 2, 2009

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What is Your Stock - A Laggard, a Leader or a Mover?

Leaders and laggards in your stocksImage Source

Do you trade stocks just without knowing what type it its? Are they moving along with the market, ahead of the market or behind the market? There is a simple categorization of stocks into laggards, leaders and movers. Knowing this can make a big difference in your trading success in the long run.

Classification of Traded Stocks

There are actually only two categories – laggards or leaders. But the stocks can be categorized into three in reality. But the third term is not right though I used it for the sake of understanding. Mover actually, in popular sense, means that the stock that is heavily traded on a given day. Even this classification can help make better bets in the next trades.

The stocks in a market can move independently on their own or get influenced by the movement of other stocks. The reasons can be different but apparently we can see that some stocks are getting influenced by other stocks movement. This apparent distinction in time between different stocks results in a whole new opportunity to trade well.

Who are Leaders?

Some stocks tend to move ahead of the market. These are called as leaders. These are the stocks that make their name in the top section of the list of gainers and losers for a given day or time period. They are moving ahead of the market not just in terms of gains but there are also cases, where certain stocks make their moves before other stocks can make their own.

Who are Laggards?

Some stocks tend to move behind the market. Generally these are thought to be as the stocks that do not make as much gains as top gainers and as much losses as top losers. But my classification here is not about that. It is about the time when they make their move. Whether it be small or big compared to the leaders but they move only after leaders made their move. These stocks are called laggards.

It is All in the Time Difference of Movements

Even though the term leader is referred to in the right sense, the difference I am going to bring up here is about the time difference between laggards and leaders when they make their best moves in price. I found that these terms are also used to refer to exactly this difference by some traders.

In between these two types of stocks there are other stocks generally which form the rest of the market that move just along with the market in synchronization in time with the indices. As these are more in number they make the part of portfolio of almost every trader. Only those traders, who stick to a particular strategy, do consider different stocks and get some flexibility in their trading.

Making a Trading Strategy Out of Leaders and Laggards

Knowing this classification of stocks, we can make some interesting conclusions. I observed that stocks that become leaders continue to be so in their next moves as well. You will get to know this as you track market statistics on a regular basis. Similarly stocks that become laggards, tend to continue like that for some more moves. It is this behavior of stocks that results in a whole new opportunity to trade. We can make a simple trading strategy out of this.

The strategy is to trade the stocks that move as laggards once you notice that leaders have just made a move. Before you can apply this, you should have already built a list of stocks that fit into these two categories. You can apply this strategy for both short term trading and long term trading as well. You can also do this for long buying and short selling as well.

So It is Fortunately a Consistent Strategy

I am amazed at how consistent this pattern of behavior is found in stocks from time to time. And in fact I don’t know when it was different. Some stocks that I found as leaders continued like that in the last bull market into the trend reversal and later bear market as well. The trick would be to take advantage of the stocks that have not yet made their move when leaders have made it.

It is not hard thing to understand or to execute this strategy. It is pretty simple. There is also no uncertainty in this as to when to exit or when to enter or which stock to choose. Just keep one thing in mind. As you are able to find stocks with certainty of move, go for any stock that satisfies these criteria and hasn’t moved yet. Don’t worry about which stock might give bigger return. After all you have removed so much of uncertainty in your trading. Can’t you cope with this one uncertainty about the amount of return of the trade?

There is also another way to benefit from this classification of stocks. It is when sitting tight as I explained earlier. When sitting tight, it will become easier to anticipate when the stock may move and you may plan exit, after determining what type of stock you are holding. If it was leader, you may consider exiting and jumping immediately into a laggard. If it was a laggard, then you know that the expected move is just about to begin. That can help you hold your patience with the stock. This is important in the long run.

First Build the List and Then Trade

If you haven’t yet done something like this, then you should start building the list of stocks. Track them regularly before classifying into appropriate categories Also note that there can be certain stocks that change their behavior from one move to next. But there are also consistent stocks. You need to pick only such stocks. To make it better apply diversification strategy here.

You too can add it into your strategy of trading and enjoy the simplicity it gives!

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