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General tips for an ideal day trader:
Remember there is nothing called perfect style/way of trading, you only learn by applying all methods & choose the best one that suits you.
1> Make the right choice – to execute a day trade or be an investor. Most people with borrowed knowledge get into dat trades – loose money – loose direction – gets converted to being an investor.
2> Practice structural thinking as a way of living. Know what technicals & fundamentals are & how best you can apply them to analyse your entry levels into a stock.
3> Stock selection – go through stocks after market close and give priority to stocks with volume spike and Open Interest spurts. Choosing stock & sector which you can understand is the key.
4> Identify if selected stock is part of NIFTY 50 or Sectorial Indices. If yes, movements of individual stocks can be matched with Index, to get a better of which way markets are moving.
Example 1: If my selected stock is Vedanta which is into metals, this stock is also part of Nifty Metal. i would watch for NIFTY Metal index as well.
Example 2: If my selected stock is Asian Paints, this stock is part of Nifty 50. I would watch for movement in Nifty index as well.
Example 3: If my selected stock is IDFC, which is not part of any sectorial indices or Nifty index, then i would be less bothered about movement in index, instead concentrate more on stock specifics.
5> If you are planning to carry forward the trade for a week’s time – you may check for % delivery against total volume of equity traded on the stock. Ideally data for 10 -15 trading sessions, helps in identifying price trend for the next subsequent weeks. (excluding budget times, results quarters)
6> Go through candle stick charts for the chosen stock – looking through these charts every day across time frame — weekly, daily and hourly you start building some idea of patterns. Note that stock can be going through different battle in different time zone. Uptrend in weekly and downtrend in daily and hourly.
7> Understand the Support & Resistance levels by going through candle charts. This will help you draw entry & exit points for a trade & arrive at a right stop loss point. This will save your mind from triggering unwanted emotions that may spoil your winning probability. Getting the support levels right will save you from worrying when stocks falls or raises & helps you into being more logical in your thinking. Also make sure to get the pivot levels right from where you choose to draw support & resistance. Daily Moving Averages is ideally used for long trades by investors, knowing 20 DMA helps in analysing trends.
8> Understand the buying / selling pattern. Check the stock BUY/Sell quantity. Note the variations that you notice & prepare your own ratio. Start noting their readings every 10 minutes, so an ideal 10 such readings – will give you some data to speculate market condition for the next 1 hour. It will clearly tell you who is having an upper hand on prices – Buyers/Sellers.
For Ex: Buy Quantity – 100, Sell Quantity – 80 .. so that says – Buyer/Seller ratio stands at 10:8.
9> If you are carrying out a F&O trade – monitor how Open Interest (OI) & Volume is changing with price – every 10 minutes for the respective month series which you have chosen. OI is very useful in understanding how liquid the market is. Bigger the open interest, more liquid the market is. And hence it will be easier to enter or exit trades at competitive bid / ask rates.
Typical Understanding / Analysis:
Increase in Price, Increase in Open Interest = More trades are on the long side, bullish view.
Decrease in Price, Decrease in Open Interest = Longs are covering their position, trend could reverse.
Decrease in Price, Increase in Open Interest = Trades are getting on the short side, expecting bearish view.
Increase in Price, Decrease in Open Interest = Shorts are getting covered, trend could turn bullish.
[Note: Open Interest is a continuous data, while Volume is for given day only)
10> Stop Loss – this is most important parameter. But understand that they are two types of stop loss – technical stop loss & money stop loss.
a> Technical Stop Loss: You should let the chart decide where the trade would stop being right. It is that very point where price will deny your original thesis of entering the trade based on the chart structure. For example, if you are taking a long trade with 1000 shares of Rs 100 each. And the nearest support is at Rs 90. So SL will be put there because that is the point which, if broken, will break the thesis of going long in the first place.
b> Money Stop Loss: This is simply deciding how much you wish to lose in the worst case scenario. For example, if you are taking a long trade with 1000 shares of Rs 100 each and you don’t want to lose more than Rs 2000. So, you will place a SL at Rs 98 irrespective of what chart says.
Well, the rationale for choosing which kind of stop loss suits you entire depends on your capital, your emotional intelligence & your risk appetite. Ideally potential stop loss should not be more than 2% of your trading capital.
Note: I have intentionally omitted using of statistical indicators/overlays on chart. This will certainly need more familiarity from readers perspective, which is difficult for me to put in on text on these platforms. But yes, these are beautiful when you understand how to apply it, it tickles your mind to have more & better perspectives while executing trades. You can always reach out to me for help in analysing overlays.
– Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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