Anticipation and reaction
There are two choices for entry. One is to make an anticipatory entry the other is reactive entry. In anticipatory entry you enter a stock in anticipation of future growth and in reactionary entry, you enter after a certain event or a price or technical action.
For certain time frames anticipation is the key to profitability. If you are trading a ultra short duration systems, anticipatory entries can be very useful. The opportunity being very small if you use reactive approach then you miss out part of the move.
The other type of traders who use anticipatory entries are value investors and macro traders. For value investor their key concept is the stock has inherent value and markets will sooner or later discover it so they buy in anticipation. One of the problem with that approach is dead money. The market may take several months or years to discover that value.
The macro traders are also basically making anticipatory entry. They make a hypothesis about future macro environment and trade based on their hypothesis. So a typical rookie macro trader makes a hypothesis based on his limited understanding of housing market, interest rates and deficit a hypothesis that Dow will drop by 50% and makes an anticipatory trade. Now if the hypothesis is wrong or early, the anticipated event does not materialise.
That is the reason you will find there are many aspiring macro traders, but few are very successful. If you are successful in your hypothesis plus timing, rewards are astronomical.
Reactionary traders react to an event or an episode. The reactive traders are market timers. If the event precipitates a rally and you react to it, you can capture a part of the move. Same way trailing stops are reactive mechanism The problem for reactive traders is you miss out part of the move and you don't know how far the instrument or stock will run. You can improve your reactionary entries by selecting events with high probability of long and sustained moves.
Most of technical analysis is reactionary. To improve the results of reactionary entries if you add an additional variable you can improve your results. The problem is the key concept or at least the assumption of most technical traders is all the market information is in their charts. No other information is needed.
In the market information to trigger a rally often exists publicly. Sometime the information is around for long time before the stock reacts to it. So waiting for reaction can often pay.
Human nature being what it is, we always like anticipatory techniques. That is the reason, there is always in all cultures a huge market for prophets, astrologers, face readers, psychics, and voodoo doctors.
For certain time frames anticipation is the key to profitability. If you are trading a ultra short duration systems, anticipatory entries can be very useful. The opportunity being very small if you use reactive approach then you miss out part of the move.
The other type of traders who use anticipatory entries are value investors and macro traders. For value investor their key concept is the stock has inherent value and markets will sooner or later discover it so they buy in anticipation. One of the problem with that approach is dead money. The market may take several months or years to discover that value.
The macro traders are also basically making anticipatory entry. They make a hypothesis about future macro environment and trade based on their hypothesis. So a typical rookie macro trader makes a hypothesis based on his limited understanding of housing market, interest rates and deficit a hypothesis that Dow will drop by 50% and makes an anticipatory trade. Now if the hypothesis is wrong or early, the anticipated event does not materialise.
That is the reason you will find there are many aspiring macro traders, but few are very successful. If you are successful in your hypothesis plus timing, rewards are astronomical.
Reactionary traders react to an event or an episode. The reactive traders are market timers. If the event precipitates a rally and you react to it, you can capture a part of the move. Same way trailing stops are reactive mechanism The problem for reactive traders is you miss out part of the move and you don't know how far the instrument or stock will run. You can improve your reactionary entries by selecting events with high probability of long and sustained moves.
Most of technical analysis is reactionary. To improve the results of reactionary entries if you add an additional variable you can improve your results. The problem is the key concept or at least the assumption of most technical traders is all the market information is in their charts. No other information is needed.
In the market information to trigger a rally often exists publicly. Sometime the information is around for long time before the stock reacts to it. So waiting for reaction can often pay.
Human nature being what it is, we always like anticipatory techniques. That is the reason, there is always in all cultures a huge market for prophets, astrologers, face readers, psychics, and voodoo doctors.
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6 comments:
Another strategy might be something in between:
Earnings and stock growth catch your attention (reaction).
Then you try to see if you are late to the party or if the stock will continue growing for the foreseeable future (2-4Q): to do this you adopt the point of view of a value investors.
GARP
GRAP? I never heard of it before.
I had to look this one on google and I found this (probably what you meant):
Growth At A Reasonable Price
http://www.investopedia.com/terms/g/garp.asp
I have also never heard of GRAP and never said anything about GRAP!!!
Check for information on Marty Zwieg (spelling?) who helped popularize the technique. Very similar to CANSLIM with less focus on the chart pattern, like earnings acceleration, revenue acceleration, insider buying, relative strength/momentum, and a PE ratio that was not too low but not too high, hence "Growth at a Reasonable Price."
AAII.com has information on a screener inspired by Zwieg.
Martin Zweig (correct spelling)
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