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Stock Trading Strategies

Stock Trading Strategies

When you trade stocks, you do not trade in isolation. It is not just enough for your trading strategy to be good. It has to be better than the strategy of other traders. The market is a perfect information mechanism as it disseminates information very fast. Hence, your strategy has to be tuned to work best in the prevailing circumstances. The strategy to trade market is to be based on the situation and where you have the maximum expertise. Each of these strategies can be profitable if executed properly and if the risk is managed well.

How stock trading strategies are executed

  • The most basic form of trading strategy is intraday trading. Here, the trader does not take medium or long term positions in the market. The focus is purely on the intraday price and volume movements and the spreads are used to make money by timing the entry and exit to perfection. Intraday trading can be profitable if risk is managed well.
  • The second trading strategy is a positional trading strategy. Here the trader takes a slightly longer time frame and tries to play a bit on charts and a bit on fundamental news flows. The focus is to identify a trend shift and wait for some time to benefit from the position. Such positions can be on the long side or on the short side.
  • The third popular trading strategy is a swing trading strategy or a momentum trading strategy. Here the trader identifies the underlying swing or momentum of the stock and trades accordingly. It involves a lot of judgement and includes a good understanding of news flows, charts and fundamental corporate announcements.
  • There is another category of traders who are called scalpers. These scalpers are essentially traders who trade on spreads. They basically trade on the small spread by offering simultaneous bid and ask spreads. They are also called market makers. They take a directional risk in the market and trade within a certain range.
  • Finally, there are arbitrageurs who just capitalize on price differentials. In the past, traders used to arbitrage between the price on the NSE and the price on the BSE. That arbitrage has almost vanished now. There is still an arbitrage opportunity between the cash market and the futures market where the trader capitalizes on the fixed return on the spread till expiry.

Managing the risk in trading strategies

Every trading strategy has certain inherent risks and these risks have to be managed. Here are 3 ways to manage these risks.

  • Intraday traders and swing traders are exposed to the volatility risk. The volatility risk can be managed with appropriate stop losses and trading discipline. Such risks can also be managed by the use of stock options to hedge the risk.
  • The second method of risk management is through appropriate stock selection and dedication to stock levels. Entry and exit points need to be monitored and back tested. That can reduce risk and enhance returns. By selecting stocks that are not too volatile and which offer predictable patterns, the risk can be substantially reduced in case of short term trading.
  • Finally, research and interpretation of news flows is the key to managing risk in trading. The more informed you are, the better your risk is managed. Incisive research helps you to identify opportunities to trade and to invest and also to minimize your risk in the stock markets. Focused research makes a big difference.
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