Reactionary Vs Anticipatory Trading
Recognizing your style strengthens results.
An area of trading I have been focused on of late is the difference between anticipatory and reactionary. I feel strongly that before you can become a successful trader you need to have a good understanding of just which type of trader you are.
A reactionary trader is someone who identifies a stock, letting price confirm his thesis and playing the move after it has taken place, hoping for follow through. An anticipatory trader is someone who looks to identify potential moves ahead of time and take a position before the price confirms this move.
Neither style is better than the other. Each is different and comes with different guidelines. Furthermore, neither is absolute. A specific trade may be quantified as anticipatory while others are reactionary but it takes a unique person to become consistently successful with both styles.
There are many variables that I believe go into deciding what style of trader you are. These include:
- The current environment
- Your temperament
- The time you can devote to trading
- Your account size
While many traders like to "feel" they are part of the fast moving action, the truth is that taking stocks when they are on the move intra-day can only be done by someone who is sitting in front of their screen when the precise moment occurs and the order needs to be placed. This reactionary style demands that a stock is watched and stops are taken quickly if the intra-day movement does not follow through.
It can be a very profitable style but if attempted by someone who can't monitor the action closely it is extremely dangerous and more often than not, a person will miss the proper buy point and end up chasing the move, buying shares from someone else who did enter at the appropriate time and are choosing to sell into strength.
Others, who can't be involved on a daily basis, may look to adopt a much more passive or anticipatory approach, finding stocks that look to be showing signs of a coming move and therefore taking them before they heat up, leaving the intra-day games to others.
Cybersource Corporation (CYBS) a stock I have recently been trading, broke out of a high pennant on Tuesday before falling back into its base but still closing with a healthy 2.29% gain. We can use this stock to review how three different types of traders would look to play it.
- Anticipatory: Finding this stock a week or so ago this trader would have noticed a consolidation pattern forming as the stock digested its recent strong move post earnings. The stock was fading on light volume back to a critical support level in the 50 day simple moving average and looked to be showing signs that another move was coming. The anticipatory trader would have entered during this consolidation period with a stop on a clear break of support. The trader would have then pared back some of his or her position, locking in gains as the stock broke out.
- Reactionary: This individual would have been watching this set up develop over time, waiting for the break to take place before entering the trade. Drawing a line from the February 1 top through the February 7 high, one can clearly see a short-term line which would serve as temporary resistance. Each day, the trader would have waited patiently for this line to be breached, which eventually took place on Monday, February 8. The trader would have entered on the breakout, placing a tight stop on a failure of this break, and then look to pare back into further strength.
- Combination: This individual would look to pursue a combination of the previous two styles, taking a starting position in anticipation of the break and then adding on the break. This individual would seek to capitalize on the entire move from start to finish and adjust stops appropriately depending on the entry point. What would be important to remember, however, is that the stop would correlate with the point of entry and the style for those particular shares and not be universal for the entire amount.
Many individuals who venture into trading first must learn just what style fits them the best. More often than not, a part-time trader attempts to pursue a style that can only be fully capitalized on by a full-time trader. Remember, it's important to understand your time frames and take a real assessment of just how much time you will have to devote to your trading.
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