Using Basket Trading to Get Ahead of the Herd

Wall Street has been advocating diversification forever.  I have my cynical reasons why, but that’s a story for a different day.  However, in certain sectors diversification is necessary.  Gold mining is a great example.  I have been trading these stocks for a number of years.  Apparently a 10-15% meltdown, when least expected, is part of a gold miner’s DNA. On the flip side, since the industry is consolidating 20-30% pops to the upside are not uncommon either. 

Many analysts suggest buying at least 10 stocks to sufficiently protect your self in highly volatile sectors.  Thus, commissions could become excessive if trading multiple sectors in a small account.  Mutual Funds were the first vehicles designed to provide sufficient diversification at a reasonable cost. Exchange Traded Funds (ETF) are Wall Street’s latest incarnation and have become extremely popular.  Their fees are often lower than mutual funds and offer some trading advantages over mutual funds.  ETFs are great, but I contend that the next best thing is already here with basket trading.

Basket trading is the ability to trade, manage and track a group of stocks as one entity.  It is essentially a custom ETF where you determine its composition instead of Wall Street.  Depending of the brokerage firm the fees are on par with ETFs.  FOLIOfn and Interactive Brokers are two brokers that I have used for basket trading. 

The true attraction to basket trading is customization.  For instance, last fall Claymore introduced the first ETF (EBB) to capture the industrialization of Brazil, Russia, India and China (BRIC).  Using a basket approach, I captured a 40% return last year on this theme – well before the Wall Street blessed vehicle was available. 

There are many more examples.  The first gold miner’s ETF (GDX) was released in May of 2006.  A basket of gold miners could have been created beforehand.  There is still not an ETF for base metal miners.  You can’t turn on CNBC without hearing about companies benefiting from global growth.  I am certain that ETFs are on their way. 

Some of the brokerages have basket analysis capabilities, but I refuse to make a trade before reading the tea leaves.    High Growth Stock Investor is an excellent software program for handling that task.  The program has many features, but its ability to create Investors Business Daily (IBD) like stock tables first caught my attention. 

IBD has a unique rating feature in which companies are ranked based on Earnings per Share, Relative Strength, Group and Accumulation/Distribution ratings amongst others.  High Growth Stock Investor has a similar feature in which a database of over 8000 stocks can be sorted based on these rankings.  Suppose you are interested in the top stocks in the S&P 500 sorted by their Earnings per Share Ranking.  Volia. 


My favorite feature is its ability to create an index out of any group of stocks.  In other words, the program will create a merged price and volume chart based on the individual components in your basket.  This can be plotted and annotated as one would any individual stock.  All of your favorite indicators such as moving averages, MACD, RSI are at your disposal.  Volia – chart of your basket.


High Growth Stock Investor has many more features.  If you would like to take it for a free two month trial run click here.

There is no need to wait on Wall Street anymore. The tools are in place for individual investors to create their own baskets and get ahead of the crowd. The next best thing is here now.

Tools of the trade:

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