Buying spin-off stocks has been found to be an excellent way to outperform the market, but it is not enough to simply find a spin-off and buy it. You have do more things than pick the right stock to be consistently successful.

What you need is a trading plan. Generally speaking, a trading plan includes at least:

• Some conditions that must be met before you do anything else; (usually called the set-up. ) What will be your sign that the time is right for your system to be most successful? For example, you might trade only spin-off stocks and their parent companies, or you might only consider stocks that are making an initial 52 week high, or that have risen a certain percentage on increased volume, or you might only enter positions when the market is trending up or down.
• What will have to occur for you to actually enter a new position. When the climate is right for your system, how are you going to find the best candidates for outsized gains? This might involve a break out of some kind such as rising above recent resistance, or forming a particular chart pattern such as the Wm. O’Neil “cup and handle”, or reporting an earnings surprise, or . . . . .
• The initial stop that will get you out of a trade if it doesn’t go as expected. This is how you protect your capital if you got it all wrong or something happened that you didn’t count on.
• The rules you will follow to make a profitable exit. There is no profit until you get out of the trade. How are you going to know when to get out?
• What size positions will you take and how you will get to that size? How much of your trading capital will you commit to each position? Will you enter in steps, or all at once?

Spin-off stocks are just a set-up, what I’ve been calling the watchlist. Where you go from there with your trading plan involves a number of decisions that you have to base on your capital, your abilities, your temperament, and anything else that you can think of that will affect your ability to carry out the plan without hesitation and without fail.

How you make the best match between yourself and the trading plan is both an art and a science. When it is right, everything else gets much easier.

As often been pointed out, you can’t be certain to win in the markets. All you can do is do what you have to to deserve to win and then live with the uncertainty with respect to gain or loss.

Tags: spin-off stocks, trading plan