Posted by lae2 on December 11, 2008 at 14:25:57:
Individual stocks rarely take off on the own. Instead, they highly correlate with the indexes. You can use a relevant index to trigger the purchase or sale of a stock. The index is smoothed by the averaging of its component stocks. This averaging removes much of the noise inherent to an individual stock.
For example, today the DOW is struggling to break through 8800. We are in bear territory and the shorts could turn this market sharply downward. Then again, Capitol Hill is voting on a bridge loan to the domestic automakers. A favorable outcome and the bulls could squeeze the bears the the DOW could rocket past 9000. What to do.
I have several profitable positions and I have no intention of giving up the profits. On the other hand, I hate to sell at the low and get whipped. The individual stocks are volatile. All stocks are volatile in the current market.
Rather than set stop loss triggers on the individual stock I am triggering off the Diamond ETF to, in turn, sell individual stocks at market. In this manner I have reduced the noise in the trigger signal by using an averaged measure.