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  1. How to choose appropriate strategy for stock trading

How to choose appropriate strategy for stock trading

Perfect trading strategy needs independent technical setup to trade. Let's understand the main factors, which influence our trading decisions

Updated: June 17, 2016 5:19 PM
We need to look for a stock, which is nearing its lowest level, from where, it's expected to bounce back. (REUTERS) We need to look for a stock, which is nearing its lowest level, from where, it’s expected to bounce back. (Reuters)

Perfect trading strategy needs independent technical setup to trade. Let’s understand the main factors, which influence our trading decisions, resulting in profit or loss.
First and foremost is the price level.

We need to look for a stock, which is nearing its lowest level, from where, it’s expected to bounce back. But the main challenge  is to pin point the time, when the price is at the lowest and when the price is at  highest levels.

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In stock market trading, this exercise is done by using technical indicators. By using one or two or a combination of more technical indicators also termed as Charts, which indicate the future trend, based on the past performance, one can come to the conclusion that a particular stock has touched it’s bottom or reached its top.

But it’s not that easy. If it was that easy, everyone must have become millionaire by trading in the stock markets but the bitter fact is that 90% of the traders end up losing money.

In the stock market parleys, it is very commonly said that “you cannot touch the bottom and catch the top”, which means it is impossible to buy at the lowest levels and sell at the highest levels. An experienced and expert technical analyst, using different type of technical indicators, with different configurations on various time frames, can work out a technical set up, which can help you in buying the stock near its bottom and sell near its top.

Volatility is another very important factor, which can beat the technical setup, if it’s not based on proper indicators with specific time frames. Those already trading in the stock markets are well aware of the fact that volatility of the stock markets is one feature, which has defeated best of the traders with best of the strategies.

Other important factors, which influence our trading decisions are emotional instability, lack of discipline and greed. Unless our trading strategy has inbuilt safe guards for these three factors, in all probability, we may end up losing money or making lesser profit.

Now to summarize the ingredients required for a perfect trading strategy, it must be based on an independent technical set up, which ensures that you enter near the lowest level and exit near the top, thus making the maximum profit in the trade.

Strategy is based on the technical indicators, which are capable to weed out the market volatility and not only protect your trade on any time frame, but doesn’t allow you to enter a trade based on the momentarily fluctuations.

The strategy can identify pre-defined entry and exit levels thus not allowing your emotions to play and spoil your trade. In the process, it controls your greed and enforces discipline for profitable trading.

Now the next stage is to identify and choose that perfect trading strategy. You can’t trust a strategy, unless you have tested the same. Look for the credentials of the technical analyst, offering the strategy, his experience and track record of the trades done based on the independent set up developed by him. Back test the set up on as many stocks as you can, before deciding to trade on this set up.

Stock market trading is an art and how to buy a stock near it’s bottom is a fine art, which depends upon the perfection of your trading strategy.

By Manjeet Singh Vohra, founder & CEO, www.tradingstation.in

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