Trading Tactics and Strategy
In This Week’s Issue:
- Special Report – MoneyTalks
- Stockscores’ Market Minutes Video – An Important Trading Rule
- Stockscores Trader Training – Trading Tactics and Strategy
- Stock Features of the Week – Stockscores Simple Weekly
MoneyTalks is a radio show that I am a guest on a few times a year with the great host of the show, Michael Campbell. He recently asked me and some of his other regular guests to submit an article for a special investor report that he put together. It is possible for any of my readers to get free access to this special report, just use the link below:
Stockscores Market Minutes – An Important Trading Rule
Traders often judge their strategy or trading skill by what has happened most recently. This week, I discuss why that is a bad idea and how to properly assess your rules.
Then, I do my weekly analysis of the markets to consider if we are still at risk for a stock market crash.
Finally, I do a Market Scan in search of trading opportunities and look at the trade of the week on NEPT.
Click here to watch this week's Market Minutes video
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Commentary of the Week –
You can get great insight from some of the most accomplished people in the world by listening to podcasts. I have a few favorites, including Tim Ferris and Dr Peter Attia. I was in the car for a few hours this weekend on a road trip and listened to Peter interview a guy named Jocko Willink, a former Navy Seal leader and instructor. The whole two-part interview was a good listen but there was one part that stuck out as being very applicable to stock trading.
Jocko made a differentiation between tactics and strategy and the importance of making sure that the soldiers under his command in Iraq understood the strategy and not just the tactics they had to carry out.
What is the difference between a strategy and a tactic?
In the context that he describes, a tactic might be to shoot the enemy. The strategy might be to win the war by engaging the support of the local people. Shooting the enemy may be important to achieving the goal of the strategy but it could also be counterproductive. If an innocent child is killed in the crossfire when trying to shoot the enemy, you quickly lose the support of the local people. Without that support, beating the enemy gets a lot more difficult. So, when applying the tactic of shooting the enemy, you must be very careful not to hurt the goals of the strategy by killing innocent civilians.
It is the understanding of the big picture that is also so important to trading. I find that many of my trading students will be too tactic focused when first starting out as traders. For example, they want to know what the specific rules are for when to buy a stock. I could easily write those rules down in just a few sentences, but I don’t start with that. Instead, I spend a lot of time teaching the big picture concepts, so they understand why we use certain tactics in the context of the greater strategy.
For example, for my day trading strategy I start with the Action Candle indicator that I created. I could say, very simply, buy a stock when it makes a 2 minute action candle that is above the previous day’s high since that is the core rule of the strategy. However, that tactic could easily miss the point. What we are really trying to do is buy stocks that are being aggressively accumulated by a large investor or group of investors. We want to ride the stock higher as the crowd pushes it up.
This distinction matters since the Action Candle is only an indication of strong buyer interest. In some situations, the Action Candle is not the signal of a start of an upward trend but, instead, could be well into it. Without an understanding of why we buy Action Candles, we could easily buy stocks making them in the wrong situation.
The same can be said for risk management. I will tend to use support on a stock chart to protect against a large loss. If a stock moves down through a well-established floor on the chart, it is a good sign that there is a problem. So, the tactic is to sell when support is broken.
However, the strategy is to sell when the stock is likely to go lower, and a break through support is just one indication of that potential. A stock that falls steadily over time down toward support will often go through support briefly before bouncing back and holding it. I don’t use a hard stop loss point at support because I know that stocks which fall in to support usually bounce at it but that it can take some time for the bounce to materialize. If my tactics are too strict, I can miss out on the goals of the strategy.
When trading, it is essential to understand the important, big picture concepts that are part of your trading strategy. The finer detail tactics are how you put the strategy to work but they are not the most important things to think about. Always keep the strategy your focus.