Jesse Livermore , the legendary speculator wrote a slim book near the end of his career; How To Trade In Stocks. In it he distilled his learning from his career. One of the lesson he learned was importance of sectors.
In third chapter of the book he talks about the importance of following the leading stocks in leading sector. Some of the key point he makes are:
- Do not turn completely bullish or bearish on whole market. Look at which sectors are bullish or bearish.
- When you see a move happening in a sector act upon it immediately, irrespective of overall market direction. But do not act the same way on other sectors.
- Confine your trading to prominent stocks in prominent sectors. If you cannot make money out of the leading sectors and stocks, you are not going to make money out of stock market as a whole.
- At any time there are only 3-4 groups leading the market.
- If you can focus and analyse just the top 2 stocks each in top 4 sectors, you need not worry about what the rest are doing.
- Always follow the leaders
- The leaders of today may not be the leaders two years from now