How To Trade Stocks: Execute A Solid Trading Plan With A Letter Grade System

What’s your very best stock? Knowing the answer is essential for creating a solid trading plan.


Have you ever heard the saying, “Sell your worst first and keep the best for last”? Your best stock is not necessarily the one that shows you the largest gain.

The stock with the highest potential to be one of the best performers of the year is your best stock.

But let’s ask a second question: How can you view your stocks in terms of the risk they each have when the market faces a downturn?

How To Trade Stocks: Assign A Letter Grade

Try this: By giving all of your companies a letter grade, say from A+ to D, you actively create a priority on which stocks to hold vs. those you should sell quickly.

If the market starts rolling over, start selling your D stocks first. Keep your A and A+ stocks, if they are holding up.

Grading your stocks forces you to research each company. Start by giving each stock an A. Then go over all CAN SLIM aspects of the stock. As you see deficiencies, lower the grade. When you find strengths, raise the grade back up.

Start by creating a set routine to ensure you don’t miss anything. Start with a monthly chart; it gives you the most history of the stock. Just as people have different characteristics, so do stocks. Some are slow and steady, while others are wild and crazy. The long-term chart makes any changes in character stand out.

You are looking for stocks with a predictable character.

If a stock has never shown the ability to consistently outperform the market, you might lower the grade substantially, from the starting A right down to a C.

Next, go to a MarketSmith weekly chart. Focus on all the information on the left side of the chart. While all the data is important, the Composite Rating, EPS Rating and most recent quarterly EPS and sales growth numbers should carry more weight with your grade.

Using MarketSmith’s Pattern Recognition, check the most recent base details and study the character of the most recent bases. If the base has a low stage count and appears to be under accumulation, you’ll increase the grade. On the other hand, you may want to lower a stock’s grade by a couple letters if it’s a wide and loose late-stage base.

Study the fund ownership, found on the related information tab. Focus your attention on the amount of high ranked funds, the more the better. Always check out the company’s website to search for the N in CAN SLIM.

Finally, study the daily chart. Search for anything that you have missed. Many times you’ll pick up subtle signs of accumulation or distribution on the daily.

Make the final adjustments to your grade. Remember, as the stocks and fundamentals change, so should your letter grade. Most of the time the letter grade won’t change that often, but it’s good to make updating it part of your weekend routine.

Daily Battle Plan

Now that you’ve graded all your stocks, the rest is easy. Study the daily chart of all your holdings. Look for key support levels that your stock should hold and place price alerts right before those levels. Don’t forget to add offensive price alerts too, to remind you to sell into strength.

With your plan in hand, you are ready for the inevitable horrible days in the market. What you are preparing for are those days that seem to come out of the blue and hit all your stocks on the same day. Sort your stocks by the highest grade to the lowest. When the market forces you to reduce, start by selling your D stocks, then C, then B, while doing your best to hold at least some of your A stocks.

Before long, this will become second nature and you will start using half grades too. You will also start grading stocks before you buy them. If a B- stock is breaking out at the same time as an A+ you’ll know which one to buy.

The first time you have to put your battle plan into place will make a bad day in the market less painful. Psychologically, you will feel in control and, right or wrong, your decisions will have been well thought out.

This article was originally published April 3, 2020.


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