The thing that makes trading such a powerful approach to the stock market is the ability to shift exposure to risk as market conditions change. When danger becomes more pronounced you cut back your exposure, and when opportunities become more robust you become more aggressive.
This general approach will give you an advantage over more passive market players, but to really produce the best returns you need to go a step further and focus on what approach happens to work best under different market conditions. The market is always shifting and it is a mistake to try constantly to reinvent your trading approach, but if you are aware of what is working overall then you can make shifts that will enhance your approach and prevent frustration.
I often comment about how the market shifts from being index-driven versus being driven primarily by individual stocks. Sometime the action is driven from the top down and other times it is driven from the bottom up. When there are major macro news events about the economy, central banks or politics, they typically cause index-driven action. Market players will buy ETFs, futures and other broad vehicles to try to capture the overall market moves and there isn't much benefit to trying to pick individual stocks.
When indices are driving the action, then it will be the stocks that have the highest weighing in the indices driving the action. Apple Inc. (AAPL) , Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL) , among other heavyweights, will see inflows as money pours into index ETFs such as the SPDR S&P 500 (SPY) , Invesco QQQ Trust (QQQ) and the SPDR Dow Jones Industrial Average (DIA) . In these sorts of markets, stocks tend to move in more correlated fashion. The ETFs don't distinguish between stocks, so when they are bought everything goes up together.
These index-driven moves often will lead to an environment where there is greater focus on individual stock picking. As the indices trend higher, market players start to look for ways to outperform their benchmark indices. The best way to do that is to find stocks that are moving faster than the indices, so stock picking becomes much more important.
Many traders do well by focusing on timing of the indices, but it is a stock-picking market that I find most exciting. When stock picking is working the gains can be much greater than what you might realize from trading indices. Technical patterns tend to work better and fundamentals become more meaningful.
In index-driven markets there isn't much regard for the merits of individual stocks, which can cause great frustration for stock pickers who are run over by ETFs and algorithms. Stock-picking markets tend to feel more logical as the focus isn't on manipulation or game theory.
Usually when the market does go through corrective action it is index driven. Most stocks will go down in tandem and there is little effort to separate the quality names from the dreck that deserves to correct. Quite often market players make the mistake of thinking that good quality stocks will protect them from a poor market, but that usually is not the case. Those quality names may come back quicker when conditions improve, but they will fall sharply simply because they happen to be held in ETFs and index funds.
One of the big style changes that traders should consider when market conditions shift is to use shorter time frames. There are markets when the best approach is pure day trading for fractional gains rather than trying to find swing or positions trades when there isn't good trending action. The shorter time frames will allow traders to stay active when the market isn't clear and will keep risk contained.
I am always searching for new stock picks, but how I handle them will be greatly influenced by overall market conditions. When indices are driving the action there tends to be greater pricing inefficiencies in individual stocks, which will offer some entry points. When the action shifts to better stock picking then we find out fairly fast if we are holding the right stocks or not.
Don't constantly reinvent what you are doing if you are having trading success, but stay aware of how markets shift. Traders tend to make 80% of their gains in 20% of the time. The other 80% of the time they are just trying to stay even and not lose money. If you realize what market conditions work best for you, then you can allocate your efforts more efficiently.