Narrow the Tradable Universe

Tradable Universe

In this post, I primarily reflect on narrowing the tradable universe and the number of open positions a trader should have.

I define Tradable Universe as the collection of all possible stocks that a trader wishes to trade at some point in time. There are 5000 components in the Wilshire 5000 index. (By the way, Wilshire 5000 is probably the best benchmark of US Equities market.) Assume that these 5000 stocks are part of the trader’s tradable universe. If the trader is not equipped with proprietary/high-tech software, then it is quite implausible to simultaneously keep track of 5000 companies. Therefore, the trader needs to narrow the tradable universe to manageable size.

How to Narrow your Tradable Universe?

I covered some strategies on narrowing the tradable universe in my previous post- What makes stocks move?- Know your sectors!

The essence of the post is that traders need to specialize in certain sectors that match their risk preferences and tolerance.

For instance, there are about 244 components in XNG, RXH, XCI, RXP, MSH, IIX, BTK, CMR, DRG and XTC. I can then look at the Sector Seasonality Calendar and select the sectors I want to focus on. Assume that I want to focus only on XNG, DRG and XTC. By doing so, I reduce my tradable universe from 244 to 45.

Next I can screen the 45 stocks using MSN’s Deluxe Investment Finder and determine the stocks that I will eventually trade.

How many open positions should a trader have?

Clearly the answer to this question will differ based on the trader’s skills. The greater the number of open positions, the more difficult to manage them. Personally I like to focus on 2-4 sectors and am comfortable with 4-6 positions. My portfolio is over-weighted on those sectors that I expect to outperform other sectors.

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Sanjeet Parab
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