The number of stock traders in our country has seen an unprecedented increase over recent years. One of the greatest pushes for this is the covid pandemic when many had to look for alternative sources of income as well as the increasing use of mobile apps that provide easy execution of trades in real-time. According to Mr. Nikhil Kamath, CEO of Zerodha (India’s largest online brokerage firm) the portal is seeing an average of 10 to 12 million orders being executed on any day. A majority of them are young traders who have just started tapping into their earning potential through stock trading. However, plunging into stock trading without clear knowledge and reasonable expectation of market volatility is like holding a hot iron stick, you are bound to get burnt! Therefore, these young traders must know the basics of trading and stock markets as well as a few tips and basic trading strategies that can mainly help them build confidence for their future trades. Once a trader is well versed in their craft, then only the sky is the limit! Given below are a few basic trading strategies that can be used by novice traders or beginners in stock trading and building their portfolios.
What are some of the common trading strategies?
Trading strategies are essentially the predefined process or tactics used to buy and sell securities to generate profits. Most trading strategies are often considered to be quite complex and difficult to understand or implement. However, some of the simplest and basic trading strategies are discussed below.
This is one of the easiest trading strategies that can be implemented by traders. Under this type of trading, traders have to match their trading with the prevailing market trend. Identifying the trend, in this case, is crucial and the primary step to starting trading. Traders can use the small window of market fluctuations to get capital gains opportunities and make a successful portfolio eventually.
Momentum trading strategy can be similar to trend strategy. Under this strategy too, traders look for strong market trends that are backed by a significant volume of the security being traded. The core principle of this strategy is to buy high and sell higher. Traders target stocks that are showing an upswing and aim to get profits at the peak of the trend. On the other hand, if security is showing a downtrend, traders can short-sell the security and gain profits when the trend has bottomed out.
This type of trading is where the traders focus more on the volume of trade rather than the profit margins. Scalpers, as are the traders of this strategy known, try to gain profits through the slightest price changes in a stock or any other security. This type of trading requires strict focus and discipline on part of the traders and they have to stick to the principles of this strategy which is to take a trading position and exit quickly. Therefore, this type of trading is not suitable for traders who aim at taking long-term trading positions. The key to successfully trading using this strategy is to aim for securities that are highly liquid and have the potential for small profits. Being greedy here will be a recipe for disaster as one high volume loss will eliminate the multiple small profits made till date.
As the name suggests, this is also a very basic trading strategy. Under this strategy, the trader is required to track every development in the stock markets and trade with the wind. This means following the latest news like favourable financials of a company, any latest developments in the field of technology that can be a market changer, any news of expansions, mergers or demergers, etc. Under this strategy, traders track the impact of the news on the stocks and take suitable trading positions.
What are the basic tips for successful trading?
Some of the basic tips to start effective trading and investing are mentioned below.
Understand the markets and tools of analysis
The first and foremost step in any venture is understanding its nuances. Similarly in trading too, it is crucial to have a basic understanding of the markets as well as to have a clear idea of the concepts of fundamental and technical analysis. This will help in correctly analyzing security and making sure that the traders are not taking rash decisions based on the slightest price fluctuations.
Target a sector and understand it thoroughly
Stock markets are an ocean of trading opportunities and it is nearly impossible to trade in every security or every sector. Therefore, initially at least, traders should focus on one sector or industry and analyze it thoroughly. Traders should have maximum knowledge of their target sector, like the top companies, market value, their volatility and market sentiment, etc.
Trade using surplus funds at the beginning at least
Stock trading is often equated with gambling due to extreme volatility. A person can lose a lifetime of their savings in minutes if they are not careful or take undue risks. Therefore, it is advisable to trade with surplus funds only in the initial period till the time that they have built sufficient confidence in trading. This way their routine financial obligations and survival will not be in danger due to trading.
Do not forget to add a stop loss
Stop loss is a trader's best friend! Traders can potentially add 100% profits in an extreme uptrend for stock but can potentially lose more than that if the trend goes south. Therefore, by adding stop loss to trade, they will be able to safeguard themselves from unlimited losses.
Trading is not new to Indian markets and there have been giants like Mr. Rakesh Jhunjhunwala and many more who have become billionaires through stock markets. But trading with caution is necessary for beginners otherwise they will be burnt out even before they learn to fly! So what do you think of these trading strategies? Do you think they are pretty easy to understand and implement? Let us know if you have some more easy trading strategies that you prefer and your experience in using them. Happy trading!!
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This blog is a collaborative effort and was compiled by multiple members of the TrueData Team