Trading Strategies - A Calculated Risk Game!

Today I was asked in the class as to what trading strategy I follow?


In fact, there is no single trading strategy that fits everyone and every market. As for me, I have two different strategies to trade in the market.


The two strategies distinguish the two types of markets we mostly come across:
1. Trending Market i.e. the prices are moving on one side, either high or low, with considerable volumes
2. Range Bound Market i.e. the prices are fluctuating with in a range and volumes are sluggish


Here, markets and stocks can be thought of as inter-changeable.


To trade the trending markets/stocks is probably the simplest one with the caveat that you can spot the trend early. The simple rule that all know, however, I am telling just for the sake is that you try to buy low and sell high to make profits. Now, if you find a stock with increased activity, read volumes, and there is a positive price action too then it signifies that people are lapping up the stock for some or the other reason. This could range from a positive earnings forecast to forex gains due to rupee devaluation or strategic loss to one of the company's close competitors! This increase in the activity is called 'Open Interest'. An increase in the open interest with an increase in the prices means a bullish outlook for the stock. An increase in the open interest with a decrease in the prices means a bearish outlook as more and more traders are looking for selling the stock i.e. the market sentiment is going against the stock.

A successful trader always (and Always) trades with the trend! If you feel that you want to buy a falling stock or short a rising stock for its valuations have peaked/plummeted beyond rationale, then wait patiently for the tide to turn. Until and unless, the broader market starts to feel the same way you do, you will lose more often than gain.

Trading the trend through breakout/breakdown method is something I have recently learnt through a Facebook community ("The Dragon's Cave") where the daily charts of the stocks would be analyzed and depending upon whether the chart pattern is making a breakout i.e considerable rise in prices with considerable rise in volumes or a breakdown pattern i.e considerable fall in price accompanied with considerable ride in volumes, trades will be initiated along the trend. With the knowledge of technical analysis, one can decide the appropriate price targets and the stop loss. Technical analysis also helps you to identify the various signaling patterns like the Triangle, Wedge, Flag, Pennant etc. which help to foresee favorable patterns on the anvil. After this point, its only about discipline that whether you can let the market do its own thing or not. Lowering your stop-loss as the market goes lower is a sign of fear and indiscipline and should be avoided. And similarly, once your target is achieved from a particular trade, do exit there and then.Fear and Greed has destroyed good traders worldwide.
The trade duration in this case, generally, varies from 1 day to 10 days.


To trade rangebound markets or stocks is a little tricky. The one method I have found considerably profitable is identifying the range in which the stock is trading, waiting for the stock to move to the lower end of the range on any dull day and pick it up there. Put a strict stoploss at a price which is below the lower end of the range by {0.5*(difference of the highest and lowest point of the range)}. There is no definite explanation for the selection of 0.5 factor here. You can change it as per your risk appetite. The strategy pays off mostly in situations where neither the bulls or the bears have a clear dominance. The trade, in this case, can last from 1 day to 4 days mostly.





The above chart of 'Aban Offshore Ltd' shows different chart patterns which when properly analyzed can be used for profitable trades.


At the end of it, any strategy can fail even after the best of the efforts put into it. However, without the spirit of taking calculated risks, there is no fun in life whatsoever. Some find that in trekking mountains, I find it in the Red-and-Green blinking Quotes! :)