I often get questions about watch lists and what should be included and how to compile them.

The first thing you need to decide is whether you wish to trade UK stocks, US stocks or some other exchange that you are more familiar with. You may also decide to add Indices if you wish to trade them. Often, trading the key Indices for the same exchange as your stocks is a good idea because it ensures that you keep an eye on the underlying trends in the market.

Building a watch list involves some work, there is no way around it and it HAS to be done and done thoroughly. It is vital to your trading success. Without a good watch list it is like backing a horse to win without studying any form or knowing the odds - it just becomes a pure gamble. The whole objective in trading is to get the odds stacked in your favour as much as possible so the stocks you trade must be the very best you can get and maintain in your watch list.

I am sometimes asked why I do not provide a detailed watch lists specifically for SwingTrader traders. Well the answer to that is:

1. I do not have the time to maintain watch lists for all the markets that SwingTrader traders wish to trade.
2. You have the same tool as me (SST SwingTrader) and the purpose of the software is for you to be self sufficient and not rely on me.
3. The perfect watch list for one trader is not necessarily the perfect list for another even if they trade the same market.

The Objective
The objective of the watch list is to have a number of stocks that have proved via back testing to trade EXTREMELY well with the optimised SST strategy and give you the highest probability of success possible. The search to improve the quality of your watch list may never stop. Stocks in your watch list, together with the strategy settings used to trade them must also be suited to your trading personality so you are comfortable when trading them.

Watch List Size
The size of your watch list will be determined by how actively you trade. If you are looking for two or three trades a month then your watch list would be much smaller that if you wanted to open 20 new trades in a month. The biggest consideration would be the number of trades you want open at any one time and whether you want a choice of prospective trades each day in order to use the secondary trade filtering explained on this site. You need to determine how many stocks you need but the more important thing is that they all have a great track record. Many traders only have 5 to 10 stocks in their watch list. On average people will have between 20 and 50.

IMPORTANT: There is an important point to make here regarding how you trade with SwingTrader. Many traders have just one trade open at any one time. This suits some traders but in my view it is having all your eggs in one basket. The way I trade and the way I suggest you use SwingTrader is to spread your capital over as many trades as you can. Lots of small trades will spread your risk far better than having one big trade. I realise that costs such as paying the spread will increase but it is far better to smooth out the profit curve. I try to work it so that I can afford to take almost every trade that SwingTrader gives me from my "First division" watch list and it is the size of my watch list that determines how many concurrent trades I enter. When I am at "full pelt" with SwingTrader I will have up to 10 or 12 trades open at once and I would, on average, close 2 and open 2 new trades per day.

Finding Stocks
Start with the "Watch Lists to get you Started" that are published on this site. You could then also go to the "UK Stock Watch List" and/or the "US Stock Watch List" some of which will be ideal for SwingTrader but probably not all. Please understand that these are purely suggested stocks to try and not all will be suitable. There are also many more stocks out there that evaluate and optimise very well, it's just that I am not aware of them yet - unless you tell me about them. Once you have checked out the stocks in the published watch lists you can, if you wish, get a full list of the stocks for the exchange you wish to trade and systematically run through those. You may also need to cross check with your broker or spread betting firm that the stocks you intend to have in your watch list are available to trade. You may also find that stocks with smaller market capitalisation optimise better than FTSE 100 or Dow 30 stocks. Yes, it can take some time but this is the groundwork that you have to do if you wish to trade successfully, the key here is that you have SwingTrader as a tool to help you do it, without that it cannot be done at all - this is the real power of the software not just producing an entry and stop each day. The quality of your watch list is extremely important.

What Decides Inclusion in a Watch List
1. Evaluation: First you need to run an evaluation on each symbol that is a potential candidate for your watch list. Based on this you will see if the stock is worth the time to optimize properly. Open a Red watch list for poor stocks, an amber (yellow) watch list and a green watch list. Move the evaluated symbols into the relevant watch list. The benefit of that is that in the future you will be able to see which stocks you have evaluated and rejected to save you trying them again . I generally tend only to optimise ones with a green traffic light because there are enough of those if you look hard enough. Having said that, occasionally I will optimise ones with an orange Traffic light if the evaluation still looks promising. There is nothing lost in optimising to see how it comes out. IMPORTANT: The evaluation does NOT tell you how well a symbol will trade and it does not tell you if it should be included in a watch list, it ONLY tells you if it is worth continuing on to optimise that symbol. You cannot finally judge whether a symbol should be included in a watch list until it has been optimised.

Here is a little tip that you may not have picked up elsewhere. Hover your mouse over the traffic light in the Control Panel and you will see a number, this is called a profitability rating. This number is a combination of %winning trades and the average win:average loss ratio which is used in determining the traffic light rating. For example 55% winning trades and a win loss ratio of 2.3:1 would give 55 x 2.3 = profitability rating of 126.5 The number by itself means little but a rating of 126.5 would rate higher than a stock with a profitability rating of 98. A stock showing 50% and 1:1 (break even) would give a profitability rating of 50. Now click the small gray area (box) at the top of the traffic light column (next to the Symbol heading). The symbols will then re-order with the lowest number (worst) at the top and the highest number (best) at the bottom. Clicking the gray box again will sort them with the best at the top. A reasonable indication of the ranking of your watch list.

2. Optimisation: I would then optimise all the green ones (perhaps overnight) and look at the back test results for each. You can optimise amber traffic light symbols if you wish but it is less likely that an amber symbol improves to be one of your best (green) symbols following optimisation. Once you have optimised all your potential symbols you can rank them in potential profitability using the tip above.

Following optimisation you really MUST ONLY be dealing with green traffic light symbols. If they are not green after optimisation then the chances are that they are simply not good enough to consider. I suggest you now have two further watch list names, Division 1 and Division 2. Division 1 will be the best of the best and will be your main watch list to trade day in and day out. Division 2 will only be used if you need more prospective trades than you can get from Division 1.

Remember also that you must be comfortable trading the strategy variation that optimisation has produced. In other words if the optimisation shows a very wide stop and you don't trade comfortably with very wide stops you may reject that symbol as a Division 1 candidate even though the results are good. You can see the stop level by clicking on the light bulb icon in the Control Panel next to each symbol. For more information see Help.

3. Back Test: Now you need to run a back test on each of the green symbols in turn in order to sort them into Division 1 and Division 2. If you have ranked the symbols by profitability rating with the best at the top then you now need to concentrate on the Equity Curve more than anything else. I suggest you get a sheet of paper and write the symbols down the left hand side (in profitability order). As you back test each one in turn take a look at the full back test results on the Summary Page and note down the key points (Profit, %wins and win/loss ratio). For full details on what to look for in a back test please refer to the "Help" text in SwingTrader. Then look at the Equity Curve. The perfect shape for an equity curve would be a straight line from bottom left to top right. This is unachievable but the closer you can get the better. Try to draw each equity curve on your sheet of paper or give it a rating of say, excellent, very good, good or poor. For more detail on reading Equity Curves CLICK HERE.

From here you choose your Division 1 symbols by profitability rating and an "excellent" equity curve. Then go to your very good equity curve, then good etc until you feel you have enough symbols in your Division 1 list. The rest go to Division 2.

Only Trade Division 1
The best of the best will be in your Division 1 watch list. As long as you are getting enough trades from Division 1 I would not even look at Division 2.

Periodically (once a month is reasonable - see Optimisation Page) I would re-optimise both Division 1 and 2 but do not re-optimise a symbol where a trade is open because you may interfere with the stop for the trade you are running. You can re-optimise that particular symbol or symbols after the trade(s) has closed. Following re-optimisation you may wish to promote some Division 2 symbols and demote some Division 1 symbols.

Always improve your list
Your watch list may never stand still for more than a month. You should ALWAYS be looking for better stocks to go into Division 1 and relegate poorer performers to Division 2 - perhaps keeping the number of Division 1 stocks the same. Always improve the bottom third of your Division 1 stocks to raise the overall quality. Always be on the look out for new stocks to evaluate - they may just end up in Division 1.

Indices
If you decide to include Indices in your watch list for trading remember that they must meet the same minimum criteria as your stocks. If they don't match up then you can choose to keep an eye on them (include in Division 1) but do not actually trade them. This will help give you an idea of what the market as a whole is doing.

Choose the Best of The Best TRADES from your Division 1 Watch List.
If you now trade only Division 1 stocks you will have a great system. However, it can still be improved by adding a degree of your own expertise. You are a trader, not a slave to a mechanical system and I recommend you use the ideas I have detailed on the page Secondary Trade Filtering.

The techniques explained on this web site and many more are in my book, "The TRUTH about Trading for a Living". In fact anyone, whether you intend to trade for a living or not but are serious about trading MUST read that book - it contains everything that I STRONGLY believe in when coaching traders. Sorry for the plug but if I had my way it would seriously be compulsory reading for every SST trader.

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David

David Graeme-Smith
Short Swing Trading.