Playing Follow the Leader

Ever watch a flock of birds flying together across the sky? It's a thing of beauty! One bird has the "lead," and all the others follow without question. The birds that follow know who is king of the hill, and whenever the lead bird changes direction, they follow because they know that the lead bird will bring them to food and safety.

Trading would be easy if all we had to do was pick out the lead stock and play the ones that are about to follow. Unfortunately, it isn't that easy. Stocks do follow leaders, but it's like watching 100 different flocks of birds, all following their own leaders. If you sit back and look at the market from a macro aspect, however, you can see that even though different groups of stocks seem to be moving in different directions the majority of the groups are, in fact, moving in the same general direction.

One of the techniques I use to determine and play stocks based on the general movement of the market is to put a basket of stocks on my screen that historically has moved with the general trend of the market. I track the stocks day after day to see if they participate in opening trends, such as a buying spike or selling dip right after the open, and then watch whether they follow the general market up or down. ...