Knowing how to trade is only part of the battle. When tackling the equity markets, we also need to figure out what to trade. There are a lot of stocks available on the NSE and the BSE. Traders need a set of rules to filter out dangerous stocks and find the ones that will offer the highest probability for success.
In our Professional Trader Course, we set out a detailed set of guidelines for stocks that are acceptable for trading and those that should be avoided due to factors such as: low volume, extremely volatile price swings, non-correlation with the broad market, etc.
Once we narrow down the list of tradable stocks, we need to identify the ones that will offer us the best chance for success during our chosen trading timeframe. There are two ways of doing this, one is a top down approach and the other is bottom up.
One thing that both methods have in common is that we want to identify the trend of the broad market, which in our case is the NIFTY and/or Sensex. Trying to trade against the larger market trend is likely to spell disaster. Even if we are able to make a profit, it is likely to be extremely small in relation to the profits we could have made by trading in the same direction as the markets.
Starting with the top down approach, you will want to identify the broad market’s trend and probable future direction. This is done by viewing the charts of your intended trading time frame and also a larger one. You want to see the trend direction from multiple perspectives and then identify the supply and demand zones to see if the trend is likely to continue or reverse.
Once you know the market’s likely direction, you can then look to the sectors that are likely to outperform the others in that market environment. Not all sectors perform as well in bullish markets or bearish markets. Some are seen as risky and excel in overall bullish moves while others are defensive and may do well when the bears take hold.
Working our way down from the sector, we are now ready to select individual stocks in those sectors. There are many market maps that will allow you to search for free or you can look at the lists available on your software. You want to find strong stocks in strong sectors to buy at demand zones when the markets are bullish. Conversely, you want weak stocks at supply in weak sectors when the markets are bearish.
The bottom up approach works well too. Using a stock screener or even just looking at a small group of individual stocks you like to trade, you would identify both long and short trading opportunities. Creating a list of long and short trading opportunities may be better for the intraday trader since the markets can often swing both directions and you will be ready to trade wherever the market tells you to go. Once you have your stocks chosen from the scanner, you would simply wait for direction from the broad markets to tell you the trend for the day and then execute your plan.
For more information on how to select the right stocks to invest in, come join us in one of our Professional Trader courses and online in the Extended Learning Track. We teach you how to combine knowledge of how to trade with the skill of finding the right trade.