Many a trader/investor likes to focus on a few names in terms of shares. Sometimes a little too much. It’s never a bad thing to know a bit about the companies we trade. However, shunning the rest of the UK 100 can mean depriving yourself of a plethora of opportunities in other blue-chips which are just as big (or bigger), more profitable, higher yielding, perhaps even in a more attractive trend (be it up or down) offering a better trading opportunity.

Trading is about looking for the best near-term opportunity, which can deliver an up (or down) move than can deliver profits. If the best looking trade you can find happens to be in a supposedly boring packaging manufacturer like Smurfit Kappa then so be it. Incidentally the former’s shares are up 30% this week having accelerated away from a strong uptrend thanks to a bid from a US peer. Just because you prefer the Banks and/or Miners, because they more around more, doesn’t mean that others ideas are not worth it.

If the best idea you can find is in a low-beta (moves around less than the index itself), non-cyclical name (less sensitive to economic ups and downs) then what’s the problem. Trades don’t always have to be in fast moving, high-beta, currency-sensitive highly cyclical shares. At the end of the day if you can get a 5 or 10% move from the former rather than the latter, then what’s the fuss? In some ways you might have an easier time monitoring it along the way, swinging about less, not reacting to each and every currency move, piece of data on the macro-economic calendar and central banker comment.

Focusing too much on a sector or handful of names can mean missing out on so much more than you realise. In fact it can result in you taking unnecessary risks for less attractive results. The risk is getting emotionally attached. “I only trade the Banks….I only like the Miners”. Why? Are you an expert on core tier one ratios; can you analyse soil samples? Unlikely. More often than not concentrating on just a few names offers mixed results at best. Worse still is the belief that, when a trade goes wrong, the next trade has to be in the same stock, even if there is no clear trading opportunity. The trade also often ends up being bigger than the last, thus risking more, in an attempt to make up for the previous loss. This narrow-mindedness and stubbornness can prove extremely harmful.

This is why Accendo’s daily trade ideas (here’s a  good example) come from a range of sectors across the UK 100 , sometimes even the . And only if there is a clearly identifiable trading opportunity on the charts. If we don’t send one out one day, it’s because we haven’t been able to identify one. They also always propose Stops, Limits and a reward vs risk analysis. This allows you to decide how much you want to risk by spreading it over the stop distance, thus dictating the size of the trade and profit objective. Risk £1K with a 50p stop loss and you will be buying 2,000 shares. With a reward vs risk set-up of at least 2x (ideally 3x), this would result in the trade returning twice what you risked if successful: 50p*2x = 100p * 2000 shares = £2,000.

Being an expert is one thing, being honest and open to the opportunities that the financial markets can offer you is another. To be a part of the Accendo research community, get access here and, as of next week, benefit from our range of helpful award-winning publications, including a forward looking Morning Report, inciteful Trade observations, well-structured Trade Ideas and so much more.

Have a great weekend!

Mike van Dulken, Head of Research, 9 Mar