Developing a consistent style of trading and sticking to it and perfecting it over time is what most successful traders do.
They do not drift from style to style. Growth investors stick with growth investing, value investors stick to value investing , turnaround investors stick to their style, momentum investors stick to momentum.
As against that most novice want to do everything and it does not work.
As a trader or investor you need to think a lot about your style and then focus on perfecting that style.
If you are say a small investor or trader trading 100k to say 10 million , you have to focus on styles that suits your account size .
With that kind of size if you decide to become a macro investor , it is unlikely to work.
Over the years most of the traders who make money focus on few styles like growth and momentum as it gives them most bang for their buck for their account size.
90 to 95% of traders use one of these style or combination of it. That has been the historical pattern and there is a very good reason for that. It works for the kind of size you trade.
What is your style?
Momentum investing in various forms is the most commonly used style by active traders.
Momentum is a tendency of stocks to continue to move in the direction of their current 3 to 12 month move.
Momentum is a very well known anomaly. If you study the momentum anomaly and various research related to it, you will find:
Jegadeesh and Titman (1993) showed that there is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets.
Moskowitz and Grinblatt (1999) found evidence of momentum in industry or sector returns. They found that high momentum industries/sector outperform low momentum industries in the next six-months.
Momentum profit reverse post 2 year holding periods.
Short term excess momentum is mean reverting
Stocks that are followed by fewer stock analysts exhibit greater momentum.
Like price momentum, stocks with high earnings momentum outperform stocks with low earnings momentum. Which is what I BD approach is all about.
A momentum strategy that buys stock near their 52 week high is profitable. Which is approach used by many traders, they look for stock with momentum trading near its 52 week high and forming a base. Minervini , Dan Zaner, David Ryan, Gil Morales, Chris Kacher and host of other traders use similar approach
Momentum effect is more pronounced in small stocks. Smaller capitalisation stocks tends to make bigger moves.
Momentum is the most commonly used strategy by traders. If you want to develop your own style start with momentum.
It will improve your chance of success .
What is your style?
Growth investing and momentum investing are more suitable for smaller investor as it allows you to make above average returns in shorter period of time.
Value investing might be safer but value stocks seldom make big moves. It is popular strategy among institutions.
When told that growth and momentum investing is better than value investing invariably many new traders ask but how did Buffett a value investor became the richest person using value investing.
There are two reason why Buffett earned his billions: first he got access to significant leverage when he bought a insurance company very early in his career (he basically invests the float generated by his insurance business which gives him tremendous leverage), and second is by avoiding to pay taxes by holding stocks for long term. Taxes are drag on returns. By avoiding taxes money compounds faster. Absent the significant leverage growth investing is better.
Study three approaches in detail before deciding on your style. One of the things about value investing is that it is intellectually very satisfying to practitioners, while not much brain is involved in growth or momentum investing. The value investors are the intellectual snobs of investing world.
Once you decided to focus on growth investing or momentum investing as your style , do a systematic study of growth investing and momentum investing. Most of those who follow this kind of style use similar approach.
By narrowing your focus on growth and momentum early in your trading career you will save ton of time and money.
What is your style?
Most active traders use swing trading style. Swing trading focuses on moves of 3 to 10 days and 5 to 20% magnitude.
Why do you think this style has been around for over 100 years and has survived in spite of market technology and structure change?
It is the most suitable style for speculators with small to medium size accounts. It allows you to make money while keeping your market risk low.
Swing traders try and exploit a structural tendency of market called momentum burst. Stocks or markets move in momentum bursts of 3 to 10 days and 8 to 40% magnitude.
These are sharp moves that happen hundreds of times in a year. Swing traders either try to anticipate such moves and enter before the start of this move or enter using limit orders when the move starts.
Another way to trade these momentum burst is by using breakouts. You enter on breakout day.
Swing traders use close stops and move stops to protect profit. Most swing traders use time stop to get out of moves that do not follow through.
Swing trading is easier style to master once you have good template for it.
Both Stockbee 4% breakout and $ breakouts are examples of Swing trading using breakout. The Stockbee anticipation method is example of using anticipation to find closer entry in swing moves.
If you want to make money trading develop your own style.....