From the Members Only site
The central principle behind the IBD 200 strategy is equity selection. An in depth understanding of that helps you understand why it works and how to make it work better.
The IBD 200 is basically top 4% stocks ranked by Composite Rating. Or in other words they have 96 plus composite rating.
Now lets look at component of composite ratings. There are two component to it financial related and price related.
pretax and after-tax profit margins
return on equity
Industry Rel Strength
Stocks price relative to its 5 week high (IBD takes those within 15%)
Now if you look at these factors closely highest weight is to Relative Strength. You will see even a 65 EPS rated stock in IBD 200 but if you look at Relative Strength ratings it will never be less than 90. Plus Industry Relative weight is again a derivative of Individual stocks relative strength.
So the most important attribute of the IBD 200 stocks which make them work is relative strength.
Now consider the other fact, the IBD 200 stocks are not necessarily the top 200 stocks in the market rated by IBD 200. In fact if you study the top 200 stocks by just Relative strength over a period of time IBD 200 members will be between 50 to 60% of that. So if you trade top 200 stocks just by relative strength and use same rules, you would still make money.
How does it matter to you as a trader whether a stock is going up because of financial factor or it is going up for any other reason. All you are interested in is capturing part of the move from a fast moving stock.
Now if you understand and internalize this logic, you will be able to trade IBD 200 based approach more profitably. In my second post I will talk about how to trade the top relative strength stocks and why I personally no more trade IBD 200. And how you can trade IBD200 without having Investor's Business Daily.