When I am teaching courses at Online Trading Academy, I often see students struggling with which trade direction they should take each day. There is a simple solution for this that is often overlooked. Trade the trend.
Trading is a lot like catching a train. You must first decide which train will take you to your destination. If you are looking to travel from Mumbai to Jaipur, you would take a North bound train. You would then board the train and disembark at a station. The trends in the markets are like those trains. Once you determine the direction price is travelling, (the trend), you would then enter positions at the stations, (the supply and demand zones).
So how do we determine the trend direction we should be trading at the beginning of the day? The easiest thing to do is to start with the broad market. When I am preparing to trade, I always look for the trend and potential direction of the NIFTY or SENSEX first. For those of you who may not know, individual stocks are heavily influenced by the broad market’s direction. It is like the tide rising in the harbor, all of the boats will rise with the water.
Look at the individual stock list on a day where the NIFTY and SENSEX dropped. The list of bullish stocks in the NIFTY was much smaller than the number of bearish ones. 18 out of 50 NIFTY stocks were bullish and only 9 of them gained over 1%. The probability to pick the right stock to buy was very low.
If you looked to short individual stocks, you had plenty of opportunities to choose from. There were 32 bearish stocks and 21 of them dropped more than 1%.
When we trade, we need to seek low risk, high profit, and high probabilities in the markets. Trading with the market trend provided them for us. But could you have predicted that the market was going to be bearish on that day? Of course you could.
The NIFTY opened right into a supply zone. This meant that the pre-market trading exhausted all of the buying orders in an area where there was more supply than demand. With no demand below, prices had no choice but to drop throughout the day.
There were warning signs on the daily chart as well. Prices had been extremely bullish as they ran into a supply zone. The large green candle entering the supply is showing novice traders jumping into longs late. The small candles for the two days inside of supply showed the bulls had given up. It was no surprise to see the price drop that followed.
When you are preparing to trade for the day, you should always start your analysis on the broad market. Determine the most probable direction of the market indexes and then look for individual stocks that are likely to participate in that trend for the day. You will find high probability for success and more consistent trading which is something we all strive for.