It is very tempting to get caught up in the mechanics of trading like chart patterns, indicator, entry and exit techniques and stops and risk management. There is lot of environmental noise related to these tactical issues in trading.
But for successful trading , strategic understanding of market dynamics is more important. That strategic pre thinking is one time effort and that is the basic foundation to trade any method.
The most critical pre thinking involved is:
- What drives the overall market
- What drives individual stock price behavior.
- How earnings affect stock price
- How sector affects stock price
- Why does momentum work
- Why does earnings breakout work
- How does the value to growth cycle work. (Cinderella Strategy)
- Why large stocks and small stocks behave differently
- What factors are most critical to short term stock price moves.
- What makes a stock go up 100/50/25% in short time frame
Overall pre thinking all these things is critical. It helps build a coherent framework about market and individual stock price behavior. That allows us to determine a strategy. Once strategy is clear, scans, software, entry, exit, stops, indicators, chart patterns etc. are all tactics.