Use tight risk management on mean reverting trades, and looser risk management on trend following trades (unless the conditions for a regime change in #2 occur, in which case, make everything tight)
On some level, I like you post, but I generally think its all far too complex.
Every single piece of advice you suggest has far too much analysis necessary. First you say we have to find which stocks will outperform the market. What kind of metrics are we going to use to do this? Will TSLA outperform because the CEO walks on water? Will Apple outperform because too many dummies out there want to make and upload Tik Tok videos?
Next you talk about finding the market conditions that allow for this. Once again, far too many variables. Even if we find this out, then we have to figure out exactly what market condition we are in right now. I'm not even sure what to call this other than an upside down world running on the FED. You have massive stimulus, excessive unemployment, bubbles everywhere, the threat of both inflation and deflation, etc. I challenge anyone to make sense of all this. A predictive framework with a better than 50/50 in this environment is just wishful thinking.
Then we have to keep our eye out on macro stuff like interest rates and market conditions? Jesus, we practically need a PhD in economics for this. Do we follow the FED overnight rate.... the 10 year, etc?
Lastly, if we are to put all of these factors on paper, how the heck do we begin to decide if this means that our chosen stock will go up or down???
The risk management portion of your reply is spot on, and I really like the distinction between taking a mean reverting trade vs. trend following. But to conclude that you shouldn't use price action is just flat out wrong. You are already using price action if you bring up the idea of mean reverting vs. trend following.
All the above points that you mention to watch are already contained within the price. As an example, rising interest rates can be both good and bad. The market can conclude that rising rates means the FED is trying to control inflation, which some might see as a good thing, and hence bid the market up. Others might see rising rates as an extra cost for a company and hence a bad thing, so stocks come down. We simply cannot know how the entire market will decide what variable is good or bad for the price of a stock. Remember, we are in a market right now that favors horrible jobs numbers because it means more stimulus. But nobody seems to worry about where that stimulus will come from. Its all just nuts.
So in the end, its best to just keep it simple. Watch the price, and have rules around what you do when price does this or that, rather than what you do when some news event or piece of information hits your radar. Your analysis of the news or information is pointless if the rest of the market doesn't agree with you.
