I use a momentum indicator to tell me which instruments are the best candidates for trading, should I get a trading signal from a second, independent indicator. I pick the two or three instruments with the greatest positive momentum as well as the two or three with the greatest negative momentum. These are the candidates for going long or going short. I don't dump a currently positioned laggard until I get an exit signal unless the laggard is just going nowhere, then I consider cutting it loose and moving that money into a new candidate.
OK, thanks; can see this sort of an approach (i.e. momentum indicator as measure of each basket member's "in-tune ness" with directional moves) would make sense for a momentum strategy. I wonder what the equivalent might be for a mean reversion strategy? How to select/de-select basket members for a mean reversion strategy?