Trading Basics: Evolution of a Trader

WAS THE INDUSTRY TRENDING?

Assess the industry trend. I count the number of stocks moving higher versus those moving lower in the same industry before I buy a stock.

For example, when I considered buying stock in Coldwater Creek (CWTR), I found that 16 apparel retailing stocks were trending higher, and three were dropping. That told me the industry was bullish, and I expected the general market to move up, too.

Another way to determine industry direction is to find an exchange traded fund (ETF) or sector fund that covers the industry you are interested in buying. For example, if I wanted to buy Advanced Micro Devices (AMD), a maker of semiconductors, I might choose the semiconductor HOLDRs (SMH) as representative of the industry. If that ETF is climbing, then it suggests a prospering industry.

• Compare the trend of stocks in the same industry or use an ETF/sector fund that represents the industry.

Compare the sector fund or ETF with the appropriate market index (Nasdaq for tech stocks, S&P for everything else). I divide the price of the ETF by the index for a relative strength test. If the tech stock is outperforming the index, which is what I am looking for, then a line chart will show the ratio moving higher. If the market is beating the ETF, then the line will slope downward. A one-month moving average of the ratio helps gauge the trend in choppy conditions.

• Compare your industry ETF or sector fund with the general market and buy industries that are rising faster than the ...