When developing a trading style, one thing many people never give much thought to is whether they are going be anticipatory or reactive in their approach. In general, people think of trading and investing success as being a function of making good predictions.
The typical methodology is that research and investigation in a stock gives rise to certain anticipated price action. Money is then invested and we sit back and wait for the anticipated payoff. Sometimes it works; sometimes it doesn't.
Reactive traders like me don't try to anticipate and predict. What we do is try to react very quickly just as a stock begins to move. Typically, strong stocks with good news don't move instantaneously. It takes a while for the market to fully appreciate the value of news.
Despite all the academic theories, the market does not price stocks efficiently, which is why trend-following works. The idea that all news is immediately and completely discounted is just plain wrong. Typically, stocks that have improving fundamentals will move incrementally over a long period, which is why we don't have to catch a stock before it actually moves.
Anticipatory investors tend to embrace the old saying "Buy low and sell high." They are very focused on trying to buy stocks at the lowest possible price. They are comfortable that the market will eventually embrace the positive fundamentals that they have uncovered. If you can find a stock before the crowd has discovered it, they you will have a great payoff.
Reactive traders also try to beat the crowd but they try to time things much tighter. They want to see stocks move immediately, and the best chance of that is if you jump in just as it is being discovered by the broader market. It requires a much more aggressive approach to be a good reactive trader but the payoff can be much quicker if done right.
Neither approach is inherently superior. Like most things in the market, success is a function of effective application. Great anticipatory investors will crush a mediocre reactive trader and a great reactive trader will easily outperform an average anticipatory investor. What works best depends not only on the individual but also on the market environment and many other factors.
In the present market I'm very focused on a reactive approach. I have no idea how much longer the current corrective action will play out, and rather than anticipate when it will end, I'm going to wait for better action to occur and then react to it.
There is always danger that the better action is a trap and I'll be surprised when there isn't sustained momentum, but the folks who try to anticipate bottoms have the same problem and have much greater risk if their timing is wrong. It is easier for reactive traders to control losses than it is for anticipatory investors who are trying to time bottoms.
It is a particularly good time to contemplate the difference between being reactive and anticipatory. If you have a bias in one direction or the other, try to understand why you feel that way. My bias toward being reactive is mainly due to my desire for quick action. I want my money to be as active as possible and the only way to do that is to react when something is in motion. On the other hand, the path to great wealth for long-term investors is to anticipate many years down the road and to wait patiently for things to develop.
Regardless of the approach you use, the important thing is to be fully aware of what you are doing and why.