The Trading Basket
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The strategy works b y trading stocks within the basket that duplicate
the S&P 500 stock index. When buy and sell programs hit the
market the stocks within the basket move. This momentum will
drive a few of the stocks within the basket in a trend direction for an
hour or more. This strong trend move is what basket traders are
looking for, and most stocks will be impacted for a short period of
time, moving fractions of a point. The basket trader wants to identify
the few stocks in the group that will have a sustained trend giving
the trader potential points over a short period of time. Many
times, the stocks thai move like this represent early moves into or
out of key sectors.
The second part to this strategy is to create baskets of stocks,
each holding three o f the top stocks in a specific sector. A total of
ten sectors are represented and are divided into two groups of five
sectors with three stocks in each basket. The total number of stocks
in all baskets is 30. The baskets can be further divided into 15
stocks on the NYSE and 1 5 on Nasdaq markets. Some basket traders
trading strategies 59
increase the number of stocks to 60 by building two different basket
groups, 30 holding stocks on NYSE and 30 holding stocks on the
Nasdaq.
If you know which sectors are showing strength or weakness,
you can use this information to your advantage. Having already constructed
the sector baskets, you can find stocks to trade long or
short. Taking advantage of both program arbitrage and sector rotation
makes trading baskets a viable strategy to consider.
The strategy works b y trading stocks within the basket that duplicate
the S&P 500 stock index. When buy and sell programs hit the
market the stocks within the basket move. This momentum will
drive a few of the stocks within the basket in a trend direction for an
hour or more. This strong trend move is what basket traders are
looking for, and most stocks will be impacted for a short period of
time, moving fractions of a point. The basket trader wants to identify
the few stocks in the group that will have a sustained trend giving
the trader potential points over a short period of time. Many
times, the stocks thai move like this represent early moves into or
out of key sectors.
The second part to this strategy is to create baskets of stocks,
each holding three o f the top stocks in a specific sector. A total of
ten sectors are represented and are divided into two groups of five
sectors with three stocks in each basket. The total number of stocks
in all baskets is 30. The baskets can be further divided into 15
stocks on the NYSE and 1 5 on Nasdaq markets. Some basket traders
trading strategies 59
increase the number of stocks to 60 by building two different basket
groups, 30 holding stocks on NYSE and 30 holding stocks on the
Nasdaq.
If you know which sectors are showing strength or weakness,
you can use this information to your advantage. Having already constructed
the sector baskets, you can find stocks to trade long or
short. Taking advantage of both program arbitrage and sector rotation
makes trading baskets a viable strategy to consider.