Stock Trader: Stock Trading Framework: 4 Steps to Solve the Abundance Problem
1. Market universe
Many of us operate in a market in an unstructured way. The market is very large and there are many moving factors that are difficult to harmonize. We try to chase the whole market and as a result we get lost without realizing it.
To get water, we have to dig in the same direction. Trading is all about judgments on the back of certain theories or methods, but the fact of judgments is that it improves when we practice with focus. In the context of a market, we have to fix our universe and we have to put it into practice. For example, we took Nifty100 as our universe, so only 100 stocks become a whole market for us, and we have to practice these stocks in a concentrated way. Once we practice the same set of actions for a while, it helps to improve judgments. Of course, over time, we can expand the universe, but it must be finite.
2. Selection of tools
The problem of abundance also lies here. We have many theories, tools, data points, oscillators and more to analyze, but less is more. Trying to know too many theories and methods of analysis can dilute effectiveness. As a stepping stone one can focus on price action as it is based on many other theories or with an understanding of price action other tools can be better utilized. Many practitioners have limited themselves to price action only. Here, price action means dissecting the charts and understanding the structure of price movement.
3. Feedback Mechanism
One of the unrealized drawbacks of unstructured analysis is that we don’t get feedback on our studies. When we operate in a fixed market universe, it gives us an advantage to continue to reconcile previous studies or views in the current market environment. Feedback is important to improve the learning curve.
Imagine a hunter running after prey. It’s funny, but that’s what we do in the market. Market and stock price movements are major decision factors for trading, it is the same as we run after prey. Ideally, the hunter sets his traps and waits for his prey to fall into them. Also in the market, we have to be prepared with our homework like understanding the strength, sector and specific movement of stocks. The strength and quality of homework improves when we have practiced and analyzed the same actions for a good period of time. After homework, we have to see if the price movement validates our view or not and based on that, we take or avoid the trade idea.
So those are four formats in the framework to improve the quality of our research and trading. The final point to share is… to operate effectively in the business environment, we need rules and boundaries to guide our behavior.
(Kapil Shah is a technical analyst at Emkay Global Financial Services Limited and a trainer at FinLearn Academy)