Day trading in stocks is risky, more so if you are untrained. However, if you have an eye for spotting market trends , you can make a neat pile in quick intra-day deals. There was a time not long ago when trading was a simple game of buying and selling stocks based on one's conviction.
Now, technical analysis- a science of predicting future prices from historical price data-has given investors new tools. But, we reiterate what we mentioned in our report, "The Kick of Quick Bucks," in the October issue, though day trading looks easy, nobody can take the right call every time and there will be days when one loses money, at times a lot of it. How it works Technical analysis is done on the basis of historical price movement plotted on a two-dimensional chart. One reason it has become popular is that anybody can look at the chart and see how prices have moved.
For example, in the chart, Easy Reading, you can see open, high, low and closing prices of the Bombay Stock Exchange Sensex on July 7, How to pick a stock Good volume and volatility are a must to gain from trading.
While volume should ideally be at least , shares, the stock should have a high beta, or volatility. Those who don't understand the concept should see to it that the difference between intra-day high and intra-day low prices of a stock is at least Rs Identifying the right stock and fixing a stop-loss level is a must, says Paul.
One must stick to the stop-loss. Generally, stop-loss is fixed at 1. Big traders generally fix stop-loss at about one-third of the expected profit. Once you zero in on the stock, look at its volumes and price trends. Generally, higher volumes with higher price rise indicate an uptrend, but it should not be considered a thumb rule. Big volumes and large moves sometimes throw up big tops and bottoms, says Barrett.
This means if both volumes and prices are increasing, it may be the last leg of the rally. Stock Trends Identifying trends is important. But how do you spot a trend? It's difficult, as the market never moves in a straight line. A stock will never fall continuously on a given day and rise on another.
Look at news related to the stock," says Chouhan. For example, if the rupee is falling against the US dollar, it's common knowledge that technology companies will gain. Analysts and market experts take the help of various parameters to confirm if a stock is a trade pick. The most used are available in any technical analysis software.
These include day moving average, relative strength index, moving average convergence divergence, or MACD, Fibonacci retracement and candle stick price chart. The terms may sound daunting, but software available nowadays makes technical analysis easy. Click here to Enlarge Moving Averages One of the widely used tools is the day moving average. You simply have to plot the day moving average on the price chart. When the price of the stock rises above the moving average line, it's a buy signal, and when the price falls below the moving average line, it is a sell signal.
One can also look the day moving average or the day moving average. Trading is a game of probability. So, you have to arrive at your own methods to decide which parameters suit you the best. In the graph, Moving Averages, you can see the Sensex movement compared to the day moving average of the Sensex. The brown line is the moving average line. In February, the line went above the price bars and the Sensex started falling.
When the day moving average fell below the price bars in April, the markets started going up. In thegraphic, the Sensex is below the moving average, indicating bearishness. But this is just one parameter. RSI is plotted on a scale of Generally, if it is above 70, the stock is considered overbought and so one can look to sell it.
Similarly, an RSI of less than 30 indicates the stock is oversold and can be bought. It reversed from 20 and the stock moved up. You just have to select the MACD and plot it on a chart. The MACD comprises two lines, fast and slow. The fast line is the difference between the day exponential moving average and the 12 day-exponential moving average. The slow line, also called the signal line, is the nine-day moving average.
So, the blue line in the chart, MACD, is the fast line and the brown line is the slow line. With technology, these calculations are automated and a graph gets plotted at the click on the mouse. When the fast line crosses above the slow line, it's a buy signal, and when the slow line crosses the fast line, it's a sell signal. The chart shows that the MACD is the best way to predict the movement of a stock.
Fibonacci Retracement Click here to Enlarge Fibonacci retracement is based on the assumption that the markets retrace by a few predictable percentages, the best known of which are You have to plot Fibonacci retracement from the peak price. The software will give the above mentioned retracement levels. When the price reaches the However, if the price falls below the The chart, Fibonacci Retracement, shows how the Support and Resistance You may hear or read technical experts recommending support and resistance levels.
But plotting support and resistance and finding it yourself is a simple job. As you know, prices move in a zig-zag fashion and form lows and highs. A support is plotted at the daily low price and resistance at the daily high price. For example, in the given chart, Chouhan says he sees support of 4, for the Nifty and if the index falls below this, it may fall further to 4, He has plotted resistance at 5, levels.
Take a look at how he managed to get support and resistance for the Nifty from the October 7 graph, Support and Resistance. Click here to Enlarge. Previous Story Banking stocks may be poised for a comeback.
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