Mix long and short trades to beat the market

• No new trades.

Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game and the contenders, click here.

I'd like to show you here in Strategy Lab that an ordinary guy with a little time and knowledge can beat most of the mutual funds and an awful lot of high-priced private money managers.

My strategy is definitely not fundamental, growth, value or even advanced technical analysis. I call it plain old common-sense, momentum-based stock screening.

My technique would probably never work for someone handling a $100 million mutual fund portfolio, but it can be followed by the average investor with a little time and effort.

I'm a boomer approaching retirement, and I started looking for a way to manage my own investments without subscribing to an expensive newsletter, buying a lot of expensive equipment or trading my 50-hour-a-week corporate job for a 60-hour-a-week obsession during retirement. My method takes only access to the Internet, a few common-sense principles, a notepad and a $10 calculator.

Off the beaten track

My premise is that you can't beat the herd by running with the herd. To make above-average returns, you have to look beyond what everyone else is investing in and find the statistical outliers: those few stocks that are having prices changes that exceed the price changes in the market.

Of the 12,000 stocks that most data services track, you need only 20 good stocks to beat the market.

The strategy is just this simple: Find stocks with prices that are rising faster than the market and go long on those, and find stocks that are falling faster than the market and short those. That part is really easy. The hard part is not overstaying your welcome and getting out before these trends reverse.

Over the next six months I'll use a standard methodology that anyone can duplicate. I won't change my method, and I'll try to explain how anyone can use it. My thoughts might not be in the proper order. But maybe after it's all over, and if I make a good showing, you can print all the journals, put them in an order you can understand and use it as your own guide to manage your portfolio.

Here it goes in a nutshell: I'll use Barchart.com (I'll explain exactly how in future blog posts) to select a portfolio of 20 stocks for long and short positions. I'll plot the Value Line Index and look at the market momentum data in Barchart.com to see where the market is moving. If 60% of the stocks in the market are trading above their 20-day moving averages, my portfolio will be 60% long and 40% short.

When any long stock no longer trades above its 50-day moving average, I'll sell it. When any short position no longer trades below its 50-day moving average, I'll close the position. I'll then look back at the Value Line Index and the Barchart.com market momentum data and replace that position with a long or short position. The market shows me what it is doing, and I attempt to stay on the right side of the market.

If it sounds simple, it is. Playing checkers is simple, too, but the longer you play, the better you get. You'll get better at investing as long as you keep practicing.