Trading in stocks and commodities is rapidly gaining momentum amongst Indians, both young and old. The lure of easy and high returns has attracted many to the complex labyrinth of the financial markets. However, the path to mastering the trading game is replete with volatility and risk, and thus demands thorough understanding, careful analysis, and a well-thought-out strategy.
The Role of Analysis in Trading
Trading and its strategies are an amalgamation of technical and fundamental analysis. These analyses form the stepping-stone to ascertain the viability of an investment. A judicious blend of these strategies can significantly boost a trader’s portfolio. It is not about guessing what the market will do next; conjecture has no place in trading. Instead, it is about understanding market patterns, following market trends, and employing a combination of refined strategies.
Fundamental Analysis
Fundamental analysis is a holistic approach to study potential investments. It incorporates economic factors, industry conditions, and the financial health of a company before investing. It involves the analysis of financial statements, company’s assets, profits, earnings per share (EPS), and envisions the possible future trends. For example, if a company has a healthy EPS of INR 50, coupled with robust yearly profits, and positive future forecasts, then, as determined by fundamental analysis, investing in such a company may be fruitful.
Technical Analysis
Technical analysis steers away from the company’s fundamentals and focuses solely on statistical trends such as historical data, stock prices, and volumes. This kind of analysis utilises charts and indicators like moving averages, relative strength index (RSI), and Bollinger bands as tools to foretell future trends. For instance, if the 50-day moving average of a stock priced at INR 1000 surpasses the 200-day moving average, it might hint at an impending bullish trend.
Trading Strategies
Mastering the art of trading involves a combination of these analyses, flexible strategies, and an understanding of one’s own risk tolerance. It is not a ‘get rich quick’ scheme; instead, it requires patience, discipline, and a clear mind free of emotional decision-making. Depending on their risk appetite and financial goals, a trader may opt for day trading, momentum trading, swing trading, or position trading.
Day Trading
Day trading involves buying and selling securities within a single trading day with an expectation of profiting from intra-day market price movements.
Momentum Trading
Momentum trading involves buying into stocks or securities that are moving at a high pace in either direction.
Swing Trading
Swing traders aim to profit from ‘swings’ in the stock price over the course of several days to weeks.
Position Trading
Position trading is a longer-term strategy where traders buy and hold investments for weeks, months, or even years.
Risk Management and Decision Making
Regardless of the type of trading strategy employed, profitable trading boils down to prudent buying and selling decisions. This is where stop loss and take profit levels come into the picture. A trader willing to take a hit of INR 1000 on a day trade may set the stop loss at INR 995 and take profit at INR 1010. This means, if the stock’s price falls to INR 995, the stock will be automatically sold to minimise loss. Similarly, if the stock’s price increases to INR 1010, the stock will be automatically sold to guarantee profits.
Conclusion
Successful trading constitutes a lot more than mere buying low and selling high. It involves strategic analysis, careful planning, disciplined execution, and constant monitoring.
Disclaimer
This article is intended for informational purposes only and should not be deemed as investment or financial advice. Investment in the stock market involves substantial risk, and therefore, each investor must carefully consider all the potential pros and cons before making trading decisions. One must seek advice from financial advisors before deciding to invest in the Indian stock market.
The information provided herein should in no way be considered as a recommendation or advertisement for any particular investment or strategy. It is the responsibility of the investor to study the market, conduct in-depth analysis, and be aware of the risks involved in trading. Investing in the stock market without proper understanding can lead to severe financial losses.
