Making Watch Lists Work for You

Yes, I know this week's column was originally going to be about options trading within an IRA. But that was before Datek announced on Tuesday that it would no longer be offering its streaming real-time quote delivery system to noncustomers. Make that nearly 600,000 noncustomers. Until now, anyone could sign up and receive a real-time streaming watch list free from Datek -- a great deal.

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If you were left high and dry by Datek and will be moving your watch list, or even if you keep watch lists elsewhere, now is a good time to review how to use watch lists more effectively. (And if you're looking for a new streaming real-time quote service, be sure to read my colleague Jamie Heller's What Works column on the subject for a list of sites that offer streaming real-time quotes.)

First, a definition or two. A watch list is literally a list of stocks you want to keep an eye on. When and if you open a position in one of those stocks, it becomes part of your portfolio. So you could say that a watch list helps you determine your entry points, while a portfolio allows you to monitor your holdings and watch for exits. Many financial sites on the Web use the terms watch list and portfolio interchangeably.

Portfolio management is a field unto itself. Here I'll be focusing solely on watch lists.

The Wrong Way and the Right Way

Used correctly, watch lists can be a potent tool -- as important to many traders as charts or Level II quotes. Yet all too often, investors manage their watch lists in a haphazard fashion. They read about a stock and then place its symbol on a watch list. Nothing wrong with that, so long as you're not tempted to trade the stock without doing more research. The more conservative approach is to research stocks and then place the promising candidates on an easy-to-view list.

A watch list lets you grasp the patterns of the stocks that interest you, just like a chart or a diagram would. Daytraders will want watch lists such as Money.net's streaming service, Screamer ($9.99 per month), that update in real time because they look for intraday patterns. Just watching the numbers change before your eyes can give you a sense of how the market's behaving. Swingtraders, who typically hold positions for several days, may be able to get by with watch lists at Web sites like Yahoo! that do not stream quotes. But if you don't mind paying the fees and you're not distracted by the constantly changing prices displayed on your computer screen, streaming watch lists are the better route. They give you an almost tangible sense of how the market's behaving.

Getting Organized

How you organize your watch lists depends on the kind of trading you do. Below are four approaches. Experiment with them for a while and modify them according to your trading strategy.

Mean Screens: This species of watch list is designed to record the results of your stock screens. Stock screens are really data-mining tools. (See these two recent Tools of the Trade columns on stock screens and fund screens.) Screens let you sift through gigabytes of financial data and ferret out stocks or funds that meet your criteria. For example, maybe you believe underpriced small-cap firms with steady earnings growth will be strong in the months ahead. Fine. Set up a screen using those variables. Hone your list by researching the fundamentals of the companies spit out by the screen. Then create a watch list of the finalists. Trade when you sense your finalists are poised to make a move upward, or a decline makes for good value. You'll be able to jump in quickly (and prudently) because you've already done your research.

Sector Movers: This watch list approach is probably better suited to daytrading than swingtrading because it's designed to reap maximum advantage from intraday moves. Suppose you like the volatility of computer boxmaker stocks. Set up a watch list of major and minor players. Then identify the sector leader. Often any major move by the sector leader will be followed shortly by moves in smaller companies' stocks. By checking back on your list daily, you can also spot other potential bellwether stocks and maybe glean patterns in how the sector as a whole moves.

Not sure just who the sector leader is? Quicken.com is one place that makes it easy to identify major players. Enter the ticker symbol for any computer stock, for example, then click on "compare companies." The resulting list shows you all the players ranked by market cap . As it happens, Dell(DELL Quote) tops the list. So put Dell and maybe half a dozen of its competitors on a watch list.

Food Chains: This is a variation of the sector-leader strategy. Pick a behemoth stock like AT&T(T Quote). Then find out who its suppliers are and even who supplies the suppliers. In the case of AT&T, suppliers would include optical component companies, handset manufacturers and so forth. A good way to find out who the suppliers are is to go to the Web site of the stock and scan the press releases. Oftentimes releases contain announcements of new partnerships or supplier agreements. When the behemoth stock forecasts slower- or faster-than-expected spending growth, share prices of its suppliers tend to move also. Here again, because you've done your homework in advance, you can catch these moves ahead of more casual investors.

Indicator Plays: This final watch list contains stocks that move on economic indicators. Transportation stocks, for example, usually tank on energy price increases (though some companies do a better job of hedging energy costs than others). Likewise, the dollar's fluctuations affect companies that derive a large portion of their profit from overseas operations. And financial service providers tend to do well when interest rates trend downward. Choose your indicator. Make your list. Perform the due diligence. Then wait for the news.

Care and Feeding

Active traders ideally should assemble half a dozen or more watch lists and be thoroughly acquainted with the companies in each. Each list could cover a different sector or indicator. That way, whatever news happens to rock the market on a particular day, you'll be up and ready to catch the resulting momentum.

Successful traders go the extra mile. They invest hours each day grooming their watch lists, carefully adding stocks, deleting others. Some I know stay up late each night pouring over the previous day's charts for each of the companies on their watch lists. Doing this day after day, they get to know the charts by heart. And that's the point at which they're able to trade almost instinctively. Sounds like a lot of work, doesn't it? Hey, nobody said this job was easy.

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More Good Active-Trader News

This week online broker Ameritrade announced it was acquiring TradeCast, a brokerage serving both daytraders and institutional traders. Here's yet another case of a mainstream broker adding a platform aimed at its most active traders. In so doing, Ameritrade followed the example of Schwab, which acquired daytrading brokerage CyBerCorp.com early last year. Other brokerages, as noted in Tools of the Trade's recent series, have chosen to develop active-trading platforms in-house. In both cases, the goal in part is to retain those clients who generate the most commissions -- namely active traders.

The motives of brokers aside, it's good news for anyone who trades four to 10 times per month. More competition means better services and lower commissions. It's hard to believe that a few short years ago there were only a handful of daytrading brokerages. And many of those brokers used the same software platforms, charging up to $300 a month to rent their software and/or $20 or more per trade. Today, at least one broker, rjt.com, charges $5 for limit orders and makes its software available free.

What's on Tap

Next week, it's options trading in IRAs, as promised. Then I'll be comparing streaming quote providers (many of which were mentioned in this recent column). As always, your comments, whether on quote providers or low-cost, reliable active-trader platforms, can be of enormous help to other traders. Please email your views to [e-mail].