Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

THE BUILDING BLOCKS CONCEPT

Let’s take a look at how each component relates to trading.

Bedrock

Wiktionary.org, a site composed of content by anonymous contributors, defines bedrock as:

1. The solid rock that exists at some depth below the ground surface. Bedrock is rock “in place,” as opposed to material that has been transported from another location by weathering and erosion.

2. A basis or foundation.

The bedrock of a trading system includes three components:

1. Philosophy

2. Psychology

3. Methodology

Philosophy

Philosophy in a trading context refers to your outlook on long- and short-term investing. Is it your preference to buy and hold for the long term, or to swing trade over the span of a few days, weeks, or months? What about day trading? Do you enjoy being glued to a computer screen, waiting intently to capture a small, short-term profit from many day trades? Would you prefer a larger profit from a few longer-term trades? What type of stocks do you prefer to trade: small caps or large caps, momentum stocks or value stocks? Your personal trading philosophy provides the answers to these questions and governs all your trading decisions.

Psychology

How familiar are you with your own personality? Do you have psychological traits that enhance or limit your success with your philosophy toward trading? Dr. Alexander Elder shares the following in Trading for a Living:

Traders gain some knowledge, they win, their emotions kick in, and they self-destruct. Most traders promptly ...