Thursday, June 10, 2010

Strategies For Day Trading

 Picking stocks for day trading is an art. To be successful in day trading the most important thing is proper selection of stocks. Most traders fail in day trading because of improper selection of stocks.
There are some rules that will assist you in selecting a proper stock for day trading. These rules can help you in overcoming the obstacles that are encountered in day trading.
These are
  • Trade liquid stocks
  • Avoid unpredictable (chaotic) stocks
  • Trade stocks with good correlation
  • Move with the trend
  • Research  
1. Trade liquid stocks  

If a stock has a high average trading volumes then it is known as liquid stock. It is advised to the traders to trade in liquid i.e. high volume stocks as traders can easily buy or sell stocks without any difficulty. Liquid stocks can also observe rapid price change, so there is more opportunity for traders to buy stocks on dips and sell at high.
There is no such rule for how much the liquidity should be for a particular stock. It mostly depends on the quantity of shares to be brought. Suppose, if we are to buy 100 shares for a particular stock then an average trading volume of 50000 is enough.
Some of the examples most liquid stocks include Reliance Industries, SBI, Infosys, ONGC etc. 

2. Avoid unpredictable (chaotic) stocks  

Generally it is seen that stocks with low average trading volume tend to behave in an un unpredictable manner. Sometime even after a news release which could be either good or bad, the stock tends to show very little variation. Traders/ investors are advised to avoid this kind of stocks.
Some of the midcap stocks and most of the stocks in S,T and Z group trade with low volumes. So it is advised to avoid these kind of stocks.


3. Trade stocks with good correlation  

It is advised to trade in stocks which are in correlation with their respective sectors. That is to pick a stock which is moving along with the sector it belongs to.Thus the stock becomes more predictable and if the sector is growing then the stock will also rise, making it easy for traders to invest and vise versa. 
For instance, if the Indian rupee strengthens against the US dollar then all IT companies depending on US markets get adversely affected.
A stronger rupee reduces the export earnings for these IT companies. Conversely if rupee weakens against the dollar the IT companies will earn more from their exports.  

4. Move with the trend  

It is always easier to drive downhill than uphill. This thing should be remembered while day trading.
If we are in a bull run then it is advisable to trade in sectors which are bullish along with the market. Similarly, in a bearish phase it is important to invest in sectors which are going to dip rather than searching for stock which are going to rise.

5. Research

Proper research before investing is always important. Most of the day traders start trading blindly. Analyze the stocks technically by studying graphs daily, drawing trend lines, channels etc. and predict the range of the stock for the next day and also the key levels of support and resistance.
Also before trading for a particular stock, have proper research of the fundamentals of the stock, try to know about the quarterly results of the stock.

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