Before I explain how I pick stocks and options, let me stress this: there is no perfect or fool-proof strategy! The top investors in the world use different methods to book winning trades.
Everyone also has different financial goals, risk tolerances, and investing styles. The key is to find the system that works best for you and then tweak it as your goals and circumstances change.
With that said, below is a summary of how I screen and select the trades that I send to Antagonist subscribers. My purpose for sharing this is to give you some ideas that you can adopt, adapt, or even reject as you build your own system.
My 8-step process to pick stocks and options:
- Go from the macro to the micro
- Review major indexes and asset classes
- Follow the flow of money
- Check ratios to detect momentum
- Dive deep within the sector
- Analyze business fundamentals and technical indicators
- Use order flow to confirm or rethink your hypothesis
- Set a timeframe and realistic expectations
Over the next several weeks, I’ll publish more details on each of these steps. If you’re not yet a part of the The Antagonist community, subscribe today so that you don’t miss those articles!
Step 1: Go from the macro to the micro
Before I pick individual stocks, I want to know what’s going on in financial markets across the world. This involves a lot of reading and listening. And I don’t mean simply paying attention to the mainstream media outlets.
You will gather much more insightful and helpful information from specialized publications and podcasts. This can include everything from crude oil prices to currency markets to geopolitical events. It’s also important to track the actions of central banks and review economic data such as unemployment and inflation.
Step 2: Review major indexes and asset classes
Next, I dive into stocks and other asset classes from a high-level perspective. Using ETF charts, I analyze long and short-term trends each day the market is open.
Below are the asset classes that I monitor with their ETF tickers in parentheses.
- S&P 500 (SPY)—this index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization.
- Dow Jones Industrial Average (DIA)—a price-weighted index of 30 of the largest blue-chip stocks in the U.S. market.
- NASDAQ 100 (QQQ)—index of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry.
- Russell 2000 (IWM)—index composed of small-cap U.S. stocks.
- Emerging markets (EEM)—index of large and mid-cap emerging market equities.
- Gold (GLD)—generally reflects the performance of the price of gold.
- Cboe Volatility Index (VIX)—real-time index representing the market’s expectations of volatility over the next 30 days. It’s often referred to as the fear gauge because investors use the VIX to measure the level of risk, fear, or stress in the market. See my earlier article for more details.
- 20+ Year Treasury Bond (TLT)—index composed of U.S. Treasury bonds with remaining maturities greater than 20 years.
- 7-10 Year Treasury Bond (IEF)—index composed of U.S. Treasury bonds with remaining maturities between 7 and 10 years.
- Investment Grade Corporate Bond (LQD)—index composed of U.S. dollar-denominated, investment grade corporate bonds.
- High Yield Bond (JNK)—generally corresponds to the price and yield performance of U.S. dollar-denominated high yield corporate bonds with above-average liquidity.
Tracking these ETFs gives me a good sense of the financial market including stocks, bonds, and gold. It also helps me understand how investors are feeling and where they’re putting their money.
Step 3: Follow the flow of money
The S&P 500 is broken down into 11 sectors. Checking the performances of each sector helps me understand where the money is flowing among stocks.
The following table shows the 11 sectors, their associated ETF ticker, and their year-to-date (YTD) performance as of March 4, 2023:
As of this writing, the hottest sectors are Energy and Materials. If I’m looking to make a bullish trade, I’ll screen for individual stocks within the sectors that are in an uptrend.
Conversely, if I want to make a bearish trade, I’ll pick stocks in the underperforming sectors.
If a sector has been climbing or crashing for a while, however, I’ll look for signals that things are about to reverse course. I’ll then make a mean reversion or contrarian trade (i.e. make a bearish trade in a hot sector or a bullish trade in an underperforming sector).
Step 4: Check ratios to detect momentum
To get an even more detailed sense of where money is flowing and to identify momentum, I like to use a ratio approach.
Using the S&P 500 (SPY) as our baseline, we can determine how sectors are performing relative to SPY. To do this, you simply divide the sector ETF by SPY. This is easy and free to do on StockCharts.
I created the above chart on February, 5, 2023. It shows the ratio of the Technology sector to the S&P 500 on a weekly basis (as of Feb. 5).
When the ratio is climbing like it was at the time that I created the chart, it means that the sector is outperforming the broad market. Most stocks within that sector were in an uptrend and represented good starting points for bullish trades.
Another way to measure momentum is through the Papa Bear portfolio. It’s a superb, simple, and low-risk strategy to beat the market. It’s also fantastic for retirement accounts and easy enough for kids to learn.
For screening purposes, the Papa Bear is a quick way to identify which asset classes have the most momentum. I simply check this free site. (See this article for a detailed explanation of how to use the site and the overall strategy.)
Step 5: Dive deep within the sector
You may have heard the expression, “The trend is your friend.” That simply means that if stocks are in a strong uptrend or downtrend, don’t fight against it. Until you see signs of a reversal, it’s best to make bullish trades in sectors that are climbing and bearish trades in sectors that are falling.
For example, after looking at the above ratio chart, let’s say that I believe that the Communications Services’ uptrend is still strong. I’ll scan companies that belong to that sector and then pick the stocks with the best profit potential. Fortunately, it’s very easy to create these scans in trading platforms and on investing websites.
Step 6: Analyze business fundamentals and technical indicators
Once I’ve identified which sectors have the most momentum and the strongest trends, my next step is to pick individual stocks and/or options.
For long-term investing, I look at the fundamentals of the business. Some of my favorite metrics are return on capital, earnings yield, free cash flow, revenue growth, dividends, and stock repurchases. That information helps me determine if the stock is a good buy.
For short-term trading, I leverage technical analysis (charts). My go-to indicators are RSI, Bollinger Bands, Keltner Channels, moving averages, average directional index, volume, support and resistance points, and TTM squeeze.
I realize that these terms may be unfamiliar and overwhelming, but I plan on writing a post on each of these steps over the next several weeks. For now, I just want to give you an overview of how I select my trades.
Step 7: Use order flow to confirm or rethink your hypothesis
My last analysis looks at option order flow. Order flow is a strategy that involves reviewing trade orders that are processed in the market. It allows you to track enormous trades — ones that retail investors can’t make. These trades are usually placed by financial institutions or hedge funds.
When you see an extremely large option order, it can often signal that somebody (with a LOT of buying power) knows something that you and I don’t know.
Unfortunately, order flow is the only step in my strategy that you can’t perform for free. You have to subscribe to a service to get the information. I use Unusual Whales (referral link).
Lastly, while order flow is helpful, it’s far from perfect. I leverage it to either confirm my hypothesis about a trade or as a “check” that makes me rethink my analyses.
Just like the other data points that I listed, order flow is one piece of a large puzzle. The best anyone can do is assess all the variables and then make a decision based on probabilities.
No one can pick winning stocks 100% of the time, but you can increase your odds through steps like the ones I’ve described so far.
And that brings us to the last step of my selection process.
Step 8: Set a timeframe and realistic expectations
After I conduct the above analyses, I select a timeframe based on my findings. For long-term investments, it’s easy. I simply hold the stock until the reasons or conditions that led me to buy it have changed.
For short-term trades, I use all the information gleaned from the previous steps to approximate how long it will take for my trade to work out. That could be anywhere from one day to several months. I typically hold options trades for 15–30 days, however.
Lastly, it’s important to set realistic expectations. Remember, there is no perfect system. Even the greatest investors in the world make drastically wrong decisions. That’s where money management comes in.
For example, if you always put on the same type of option trade for the exact same amount of money, you only need to be right slightly more than 50% of the time to make a profit.
If, however, you cut your losing trades quickly but let your winners run, you can still turn a profit with a winning percentage in the 40s.
That said, my goal for my short-term trades is to have a winning percentage of around 55%–60%. If I practice sound money management, that win rate will yield very strong profits.
You do you
As I said at the beginning, this is the system that I use to pick stocks and options, but that doesn’t mean it’s for everyone.
Remember, there is no perfect strategy. And that’s a good thing because it means that there are multiple ways to win. The best thing for you to do is to find what works for you based on your goals, risk tolerance, and investing/trading preferences.
More details about each step in my stock-picking process
I realize that I only provided an overview of my strategy. My plan is to write articles on each of the 8 steps that I summarized above. If you’re interested in reading those, subscribe now so you don’t miss them. It’s free!
I hope this overview helps you build your own system. Feel free to drop me a line in the comments if you have any questions or feedback!
Thanks for reading,
Jason Milton
Disclaimer: I’m not a stockbroker or financial advisor. I cannot and do not provide personal investment advice, and The Antagonist should never be interpreted in such a way. The Antagonist is an online financial literacy resource. All materials from The Antagonist are intended for informational and educational purposes only. They are not, nor are they intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested.
My recommendations represent the actions that I plan to take or have made based on my analysis and what works for me. I do not make any warranties about the completeness, reliability, and accuracy of the information I share. I will not be liable for any losses and damages in connection with the use of my content. Any investments that you make are your responsibility.
Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. The Antagonist is not in the business of transacting securities trades or an investment advisor. Therefore, it is imperative that you perform your own due diligence before replicating any of my trades. Also, options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must read Characteristics and Risks of Standardized Options carefully before investing in options.