My 5 Step Process

Dear Jody:

Thanks for getting back to me. I am happy to share with you my 5 step process. My approach to the market has evolved over time. What you have before you is the result of years of research, trial and error – lots of it.

My background is in economics. More specifically, free market economics (Austrian school).

The 5 Step Process

Step One | Market Analysis

Step one is to determine whether to be in the market at all. Do we want to be on offense (capital appreciation) or defense (capital preservation)?

My primary market indicator is built around the concept of ‘bullish percent’ which has been used for more than 40 years. Bullish Percent measures the overall risk in the market. The BP reading sets our bias and answers the question will we be long or short?

Step Two | Sector Analysis

Next, I look deeper and dig into the sectors. I drill down into each of the 12 major market sectors and 40 sub-sectors to determine which, if any, offer the best chance of success. I do this using Bullish Percent and Relative Strength.

Industry sectors, like the four seasons, move in and out of favor. I want to be long the most favored sectors and to avoid (or short) the least favored ones.

* I should note here that academic studies have shown that 80-85% of an investor’s performance is derived getting steps one and two right.

Step Three | Fundamental Analysis

Fundamental analysis tells me what to buy or sell short. My goal here is to create a watch list of companies that are considered to be “best of class” or “worst of class” in each sector. I am not a fundamental analyst by trade so I use the research of several “buy side” research firms.

Step Four | Technical Analysis

Technical analysis answers the question of when to take action. Step four is the application of technical analysis to our watch list. I am an avid fan of technical analysis and have been using it since my introduction to it in 1975. I specialize in Point & Figure charting. I use P&F charting when trading stocks because I have found that it eliminates most if not all of the noise surrounding stocks and the indices. I am a position trader and not a day trader. I like to hold positions anywhere from 1 week up to a year. I will hold positions longer than 1 year if the technical picture is still positive and improving.

Step Five | Risk Management

The final step in my investment process is managing the portfolio. This final step is what sets me apart from others in the industry. The concept of risk management is one that is foreign to most investors. I consider this the most important step.

I have a risk limit for each position and the portfolio as a whole. I use a combination of stop loss orders, advanced option strategies as well as synthetic stops where appropriate. It should be noted that the risk is determined before a trade is ever placed.

Getting in is the easy part. It’s the exit strategy that determines whether the trade is successful or not.

This system works for me and I think it will work for most investors because the key to investment success is simply having a process. Developing a process is not hard. The hard part is making sure that your process works for you and your trading style.

That’s about it. If you have any questions, don’t hesitate to get in touch with me. I’ll be more than happy to help you in any way that I can.

Bob Christy
The Intelligent Trader