If you are serious about your trading there are some concepts you must know in significant details. Those concepts will help you build a strong foundation on which you can build a trading system. There are seven concepts you should study:
- Momentum : If you understand this you will understand trends and mean reversion. You will understand why and how momentum works in the market. Most indicators are momentum based. Trend following and buying strength also works, so does mean reversion. They are all part of the momentum phenomenon.
- Market Breadth: Stock markets are composite markets. The overall move in market is an aggregate of moves of several hundred or several thousand stocks. So the level of participation in a move is important.
- Equity Selection: Because the overall market is a composite of many individual moves, it becomes critical to select right kind of stocks from the universe of stocks. Hence equity selection is extremely critical. You should know various ways in which one can select equities.
- Market Anomalies: Market anomalies are the distortions in the market. If you base your trading on a proven and statistically significant anomaly, you will be profitable. Absent that no amount of indicators will help you. A through understanding of anomalies will give you an edge.
- Market Microstructure: Market Microstructure is a branch of finance concerned with the details of how exchange occurs in markets. Understanding this will tell you how the market operates. The concept of market microstructre is very critical if you are trading very small time frames or are a day trader. Because to be successful on those time frame you need to find exploitable anomalies in market microstructure. You need to understand role played by market makers, automated programs, arbitragers, large fund buyers and so on. Their tactics and behaviour creates certain patterns
- Growth investing : Growth investors buy stocks of companies growing faster than the average company in the market.
- Value investing : Value investors buy stocks of companies which are cheap or out of favor.