What is trading? What are common trading strategies?

Trading is an activity of buying and selling stock based on short term or long term price movement. Basically two types of trading strategies is available one is active trading another is buy and hold trading strategy.

Active trading strategy (short term) is suitable for short term investor while buy and hold strategy (long term strategy) is suitable for long term investors. Here I have some trading strategies which come in active or long term strategy.

Intraday trading:

Intraday trading strategy comes in active trading strategy (short term trading strategy). In intraday trading buying and selling of stock are done on same day before the market gets closed. No position is held for next day. Intraday trading is an active trading style. Traders who trade in intraday trading are called active trader. Intraday trading can be risky if trader trades without money management or trading disciplines. In day trading strategy traders used to make profit from difference between buying price and selling price within same day.

Position Trading:

Position trading comes in buy and hold trading strategy. Long term investor trades in position trading strategy. Position trading technique use daily charts and some indicators to find trend in market. These types of trend can lasts for a week or a month. Positional traders trade when market is moving in one direction. Positional traders trade when trend has established and leave market when trend is about to break.

Swing trading:

Swing trading comes between short term trading and long term trading. In swing trading trader hold the scrip for more than one day like 2 to 3 days. Swing traders generally create some algorithms from fundamental and technical analysis. Using that technique swing trader identifies entry point and exit point to the market. Swing traders gets active when one trend is ending and new trend is about to start. Swing trading strategy works best when market is going in one direction up side or down side.

Scalping:

Scalping comes in an active strategy. This strategy is employed by active traders and lasts for very short period. It is a day trading strategy and focuses on making small profit from many trades. Scalper holds stocks for very short period and that way they decrease the risk of money loss. Scalper does not wait for long moves in market they take advantage of smaller moves that happens frequently. Scalper generally likes to trade when the market in range bound or sideways.

Basics on Future and Options

Future ad options are derivative basic instruments in stock market. Derivatives are financial instruments and their values are driven by stocks, currency, and gold.

Future:

Future is a derivative in which there is a contract between buyer and seller to buy or sell assets for specific price. If you buy future you have to pay for assets within specific time and if you sell assets you have to transfer assets within specific period of time.

Future contracts are available for equity stocks, indices, commodities and currency. Price of the assets in future market is more than the price of the assets in spot market. This price difference is generally negative and known as basis. The difference between prices is just because of some storage cost, or some other expenses.

Options:

In option derivatives holder of instrument has right to buy or sell the underlying assets at the pre determine price. This pre determined price is called strike price. An option can be of two type call option put option. In call option buyer has all rights to buy assets at given price, while seller has only obligation no rights. If buyer wants to buy assets seller have to sell that assets.

That means once seller sells their assets they don’t have any rights over that assets. In put option buyer has rights to sell the assets to buyer and seller has just obligations to buy the assets.

In option contract buyer has all rights while seller has only obligations no rights. Is the seller of contract break the obligations, seller has to pay for that, and that amount is called premium

What is trend in stock market? What are the different types of trends available in stock market?

Market trend helps the trader or investor to find buying or selling opportunities in stock market. Market trend is like behavior of stock market, which moves in one direction. Market trend can be classified as follow.

• ·         Secular market trend
• ·         Primary market trend
• ·         Secondary market trend

Secular Market Trend:

Secular market trends are generally lasts for many years like 15 to 20 years. They are long term market trends. Secular market trend can be further classified in bull secular market trend or bear secular market trend.

Primary Market Trend:

Primary market trend generally lasts for years. They can be classified further in bull market, bear market, market top, and market bottom.

Bull market trend generally indicates advances in the stock market over period of time while bear market indicates declines in stock market over the period of time. In market top or market high trend market will reach its highest point for some short period of time. Opposite of market high trend, in market bottom trend stock reaches to its bottom. These two trends are very difficult to find and leaves for short period of time.

Secondary term Market Trend:

Secondary market trend are leaves for very short period let say few weeks. These types of trends are like some minor changes in price direction. Secondary market trends are of two types one is correction and second is market rally.

Correction is a downward trend and declines the prices up to 5% to 20%. And another secondary trend is market rally sometimes called sucker’s rally or dead bounce cat. Market rally will increase the price of stock only up to 10% to 20%  

How to find Trend using ADX

Many traders or technical analyst used to follow trend in stock market. Technical analyst use ADX (Average Directional Movement Index) to find trend in stock market. Actually ADX is not a directional indicator; it will not give you direction of trend. Instead of direction or momentum, ADX can give you strength of trend for particular scrip.

Value for ADX varies in between 0 to 100. As the value of ADX changes the strength of trend will also change. If the value of ADX is below 20 then it is very poor trend. And if the value of ADX is above 40 you can say it is strong trend.

There are lots of strategies to find trend using ADX. Here is one strategy to find trend using ADX in stock market. ADX is a combination of two other indicators. One is positive Di and second one is negative DI. We can use positive directional indicator (+DI) and negative directional indicator (-DI) to find the direction of the trend.

If the value of +DI is higher than the –DI you can say it is up trend, while if the value of –DI goes higher than +DI then you can say it is down trend. +DI or –DI are nothing but the directional indicators which are used with ADX to find direction of trend.

Sometimes +DI / -DI generates false trend signals, to prevent these false signals we must confirm the value of ADX. If the value of ADX is above 20 or rising above 20, than and then you can confirm that trend is up trend or down trend based on the value of +DI / -DI.

Support and Resistance level in stock market

Support and resistance is the concept of technical analysis of stock market. In stock market if the demand for scrip increases then the price for that scrip will increase, and if the supply of that scrip increases then the price for that scrip will decrease.

What is support?

Support level is the level that protects prices from going down further. Support level is the level where buyer becomes more active and started buying stocks. That’s why demand for that stock goes higher. So that price for that stock reaches to the support level. In short at the support level demand of the stocks becomes stronger and that will prevent the price from further decline.

What is resistance?

 Resistance level is opposite of support level. Resistance level is the level that protects the prices from going higher. Resistance level is level where seller becomes more active and started selling stocks. That’s why supply for that stock goes higher. So that price for that stock reaches to the new resistance level. In short at the resistance level supply becomes stronger and that will prevent prices from further rising.

Generally we can find support level below the current price while resistance level is found above the current price of scrip. Some traders use trend line to find support or resistance level.

If the price goes below the support level then it will create a new resistance level, and if the price goes above the resistance level, it will create a new support level.

It is most difficult for technical analyst to find exact support and resistance level. It is even most important for technical analyst to find exact location of support and resistance level. If the scrip is approaching support level, than it is clear indication of increase in buying pressure. If the scrip is achieving resistance level, than it is clear indication of increase in selling pressure.

 If the relation between supply and demand gets changed, then stock will break support or resistance level. If the demand gets higher than supply, resistance break out can happen, and if the supply goes higher than demand, support break out occurs.

Breakouts in stock market

There are lots of traders in stock market who are waiting for breakout to be happening.  Breakout occurs when any stock make new high or reaches to the previous resistance level or break the trend line. Breakout in scrip could happen for 5 min or even years. E.g. if stock is trading in range bound condition few months and all of sudden stock is trading above the range bound price, you can say it is breakout stock.

 

Generally breakout stocks are profitable because many traders likes to trade when stock is in break out condition. So many traders will try to buy that scrip. So that volume for that scrip will increase and demand for that stock will also increases. And that will bust the price higher for that stock. If the stock has been in range bound condition for a long period and makes breakout, this kind of breakouts are stronger and gives more profit.

While breakout patterns are profitable traders must aware of false breakouts, false breakouts happens when many traders are not ready to buy that stock. In short volume of stock during that breakout condition is very low. Sometimes breakout condition could be generated by market makers, so you must confirm volume of stock during the break out condition before you start your trading for that scrip.

Sometimes you can see breakouts in penny scrip; these penny breakouts are highly risky and can generate more profit in short time.     

    

There are many ways to find breakout conditions; trader can manually search for breakouts. You can use volume shocker to find breakout stocks, if the volume of stock is higher than 5day average volume. You can use gap up stock screener with higher volume. Gap up stock screener allows you to find gap up stocks. Even trader can use trend to find the breakout conditions.

 

EMA Crossover to find Buying and selling opportunites

EMA stands for Exponential Moving Average. EMA is similar to SMA (simple Moving Average). EMA is a technical analysis indicator. Technical analyst or trader use EMA for analysis of scrip. Generally technical analyst of stock market use EMA 10 or EMA 26 to find buying and selling opportunities. EMA is quite simple compared to other indicators. 

EMA can be calculated using following formula.

EMA = {Close – EMA (previous day)} * multiplier + EMA (previous day)
Multiplier = (2 / (Time periods + 1))

We can use EMA indicator to find buying and selling opportunities in stock market. According to stock market strategy, if the value of EMA goes higher after EMA crossover then it is buying opportunity. If the value of EMA goes down after the EMA crossover then it is selling opportunity. 

 

Here from image, we can see after EMA crossover, EMA is going down so, it will create selling opportunity. We can see sell call from image. And when EMA goes higher after EMA crossover it creates buying opportunity. We can see buy call from image.