In the last couple of articles, we have discussed two powerful strategies which can provide you with a good capital appreciation when it used with discipline in the long term. In this article, we aim to talk about a few general characteristics of the market along with how you can use it to make more profits.
Strategies, in general, work only when certain conditions are met. In a bull market, Sell Today Buy Tomorrow (STBT) strategies might not work and in a bull market, Buy Today Sell Tomorrow (BTST) strategies might not work in a bear market. That is why it is always important to never take your eyes off the ball.
Here are a few patterns and simple strategies you can optimise, to increase your profitability:
Trading between 11:30 AM and 1:30 PM
By and large, the market will be volatile in the first one hour. You will find that even large indices are not spared from whipsaws due to the indecisiveness of buyers and sellers. And from 10 AM to 11:30 AM, the market will be in a consolidating phase and buyers and sellers of individual stocks will determine their trend for the day. So, the optimum time for you to enter the market would be at 11:30 AM. If you identify the stocks which have a clearly established uptrend or downtrend, you can enter those trades with a strict stoploss and exit at 1:30 PM, which is another time when reversals can happen. Usually, at that time, the European markets will open and create a new volatile environment which could reverse the direction of movement of your stocks.
Unusual volume indicates institutional buying or selling. Institutions are big players like investors, mutual fund investors and very high volume traders. They invest in companies after thorough fundamental analysis and will ensure that they place the right bets. So, more often than not, if you follow such large buying and selling, you can make profits as well. You can use screeners and scanners to find stocks with unusual volume easily by using screeners and scanners.
Average traded price and open
Another commonly used strategy is the ‘weighted average greater than open’ strategy. Just like the open high low and pivot trading strategy, this one is simple enough to be followed by novice traders. To understand this, let us go back to the candlestick pattern. Like we mentioned in an earlier article, the traditional Japanese candlestick gives us a lot of details about the stock’s price like its open, high, low and close for a given time frame.
There are many calculations and indicators that we can use to determine a stock’s traded price. But the volume weighted average of the price gives more importance to weighted momentum instead of just a random movement. So, when the 15 or 30 minutes candle opens at a price greater than the average traded price then it indicates a strong buy. It also indicates that institutional big guns are eyeing the stocks. You can use that to our advantage and enter the trade when it’s at its market bottom. Please note that even this strategy does not guarantee profits 100% of the time as it can still give out false signals.
It can be virtually impossible for you to manually scan stocks whose open is greater than the average traded price. Trading platforms like Zebull make the whole process easy for traders by providing scanners which can be modified to shortlist stocks which satisfy certain criteria.
Choosing the right stocks
Choosing the right stocks can be confusing as each strategy requires stocks which satisfy a certain set of rules. While scanners can help you do that, we still recommend trading with Nifty 50 stocks which satisfy the set conditions. These stocks are the top fifty stocks listed in the National Stock Exchange (NSE). This ensures high liquidity and low volatility. You could also choose stocks based on different sectors like automobile, pharmaceutical, infrastructure or housing finance.
As we have reiterated several times throughout the ten tenets series, maintaining a strict stoploss as well as trailing the existing stoploss for swing trading is extremely crucial. It doesn’t matter what strategy you use for trading – as long as you have implemented a good risk management setup, it might go to waste. Also, take the risk-reward ratio into account before placing that winning order. The optimum risk-reward ratio is 1:2. Through proper money management, you can reduce the drawdown of any trading strategy by a significant factor. Happy trading!