How to Trade Your Own Basket of Stocks


Not everyone can monitor the market on a tick by tick basis and jump in and out of securities at the markets’ whim. Actually, most people probably fall into this category. How many times have you walked into that meeting only to come out an hour later to see that breakout you bought sunk back below your entry point, way below. Life just gets busy.

If you’re in this boat, maybe basket trading is a better approach. Think of a basket of stocks as your own Micro ETF. A smaller pool of stocks working for you based on your own criteria and investment allocations.
First you decide on a timeframe; weekly, monthly, quarterly. It’s up to you on how active you want to be in managing your basket.

Next, you select a list of stocks based on criteria such as earnings, sector, momentum rank, short interest, or any other attributes you’re looking for in a group of stocks. Then you decide on how you want to allocate funds across those stocks; fixed dollar amount, percentage, or equal number of shares are just a few examples.

Finally, you prune and add stocks based on your selected time-frame. For instance, if you want to manage your basket on a monthly basis, you could sell all positions on the last day of the month and create your new basket on the first day of the month. Are you one of those people who hate to take profits and never take a loss? This type of method would help force you to take those gains and cut your losses.

This method is not totally hands free because you do need to add some rules to protect against any catastrophic losses. Distributing your money across a pool of stocks will help, but you still need to plan for any individual position moving significantly against you. Adding a max 8% loss rule would protect you. For example, you are holding Stock A in your September basket. On September 14th it drops 8%. At this point you would sell the stock. You do not immediately replace that stock but wait until your basket reallocation on the first of the month.

On the flip side, you may want to add a profit taking rule. This time Stock A releases some positive news on the 14th and is up 20% for the month. In this case, you could have a ‘take 50% off’ rule where you sell half the shares at 20% and hold the second half for the rest of the month. You can make these rules as complicated or simple as you like. In the end, it comes down to how much participation you want to have in managing the basket.

Two of the brokerage services I use offer basket trading enhanced functionality.

Fidelity will let you create a basket and monitor the entire basket as a single entity.

Fidelity will calculate total shares to be allocated for each stock based on your chosen method of distribution and total dollar amount. They also have a watch basket function that will let you assign a specific purchase date for that basket. You can even run multiple baskets side by side.

Ameritrade users need to go to the Portfolio Planner found under the Accounts tab. From there, click “Develop a Target Allocation”. Once there, click “Basket of Securities” on the top right.


Once you've selected your securities, you will assign target percentage allocations for each. You will then be able to automatically set orders based on those target allocations.

Ameritrade even offers and option to turn on or off margin usage:
When your allocations are set you can monitor your basket through the portfolio planner.
Most brokerage services offer some type of basket capabilities with their service. Normally, a quick search for “basket trading” should get you to the help documentation for your brokerage.

Overall, basket trading gives you a way to build and manage your own Micro ETF. Allowing you to take a hands off approach to the market while letting you allocate your money across a highly focused set of stocks built on your own criteria. Adding sell rules protects your gains and limits your losses which will help you to outperform the indexes over time.

2 Response to How to Trade Your Own Basket of Stocks

September 8, 2012 at 10:40 AM

thank you for this post. I am a big believer in the K.I.S.S. method.

takes the second guessing out of the picture.

September 10, 2012 at 7:23 PM

Nice work, simple methods are often the best.

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