Reactive vs Predictive trading
Neophytes often believe that the most successful traders possess an omniscient understanding of the market. However, this is a misconception. Every professional trader I know who earns their livelihood from trading is reactive, not prescient.
Thus, headlines like today's from the BBC do not unsettle them...
They may seek to understand the reasons behind market movements but recognise that their primary task is to react to the information at hand.
How does this translate to the reality of trading? From personal experience, I employ various market, sector, and industry overlays to discern one key factor: what is moving up and what is moving down. If my broader analysis suggests a favourable trading environment, I search for the best stocks based on both technical and fundamental criteria. Acknowledging that I will be wrong more than 50% of the time, I set hard stop losses to automatically exit trades with minimal losses. This approach results in a high reward-to-risk ratio, which more than compensates for the low win rate. If a stock continues to rise, I maintain some level of position, even if I scale out gradually. In some cases, I use historical reward-to-risk ratios to set targets. Should the stock reverse, my trailing stop loss will ensure I exit the position.
Nothing in this straightforward strategy requires prediction; it is entirely reactive and based upon what is observed, not what is hypothesised.
In essence: