How I Trade My IRA

As a special feature for April, TheStreet.com offers a seven-part series on maximizing your IRA. This installment is Part 7. Click here for Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6.

In earlier parts of this series, I've talked about various options available for IRA investments and, based on my own experience and judgment, what investment principles and practices have a good chance of providing superior performance for those willing to become unemotional and independent investors. Now I'm going to outline my own personal approach to investing in individual common stock issues in my IRA.

My approach actually could be applied to any common stock investment portfolio but there would be tax consequences to be reckoned with in taxable accounts.

I am not a true long-term investor. For me, attempting to forecast the future three to five years from now is a laughable exercise. Our world moves so quickly that I am only willing to hazard a guess about the next couple of quarters.

The end result is that I do quite a bit of trading. Fortunately, commission rates are quite low and now can even be zero if you go to the right broker.

My first step when looking at the investment world is to ascertain what I believe to be the current stock market environment and then translate that view into a target cash position for the equity part of my total investment portfolio.

Using technical and psychological indicators, including a couple I have previously profiled in this series, I arrive at what I consider to be the basic trend of the market. Currently, as it has been for several years, I judge that trend to be bullish.

Then, using a set of more intermediate-term indicators, I arrive at an actual target cash position. I have a set of three intermediate-term indicators that include the total volume of individual equity and index put and calls on the Chicago Board Options Exchange, the CBOE option ratio (which is similar but excludes index options) and odd-lot sales and purchases.

Below is a weekly chart of a composite of these three indicators over the last five years.

The black ranges show the high, low and close for the S&P 500 on a weekly basis, and the red line shows a composite of these three indicators.

The last plot of these indicators was made on March 23, 2007. At that time, on the basis of the bullish long-term trend and the position of these indicators, I had a target cash position of 6%. That was down from 20% a few weeks prior.

Three Key Indicators Composite of CBOE option volume, option ratio and odd-lot sales

Click here for larger image.

Once I determine my cash target, I begin to look for stocks to buy if my actual cash exceeds this level. I do this by using a screening system that I have developed over the last few years (and continually tinker with as I learn more). It has two main components that are evident (really almost obvious) when looking at the attributes of winning stocks: value and momentum.