Most baseball fans know that Barry Bonds currently holds the record for most home runs hit during a professional career. But are you aware that he also ranks 46th overall in strikeouts as well? His 1539 strikeouts are more than double the 762 times he hit one out of the park!
We all want the large winning trades when we are looking for opportunities in the markets. But how many times can you afford to strike out with your money? To be successful with your trading, you need to be consistent and not just look for the home run.
I’ll admit that it is not every day that an intraday trader will find that large winner. However, if you follow the right steps to prepare for trading every day, you will be more likely to find these opportunities when they arrive. As a bonus, you will also be able to identify and trade high probability trading setups that will be available consistently.
So what are the steps that you need to prepare for trading? Surprisingly they are not difficult or even too time consuming once you make it part of your routine. The first step is to identify the overall trend of the broad market. We use the S&P 500 in the United States but if you are trading in other countries you can use the Nifty, the Straits Times Index, the Nikkei, the FTSE or any market index. You need to then anticipate the probable direction for the trading day. Use your technical analysis skills to judge the strength of the trend and even see what related markets are doing. This includes index futures.
Once you have finished that research, then you need to find the stocks that will best participate in the move of the market for the day. There are a multitude of stock screeners that allow you to search for these. Remember to filter for stocks with good average volume to avoid being stuck in a trade or manipulated by a specialist or market maker. You also want to filter for stocks with good volatility but not so much that you are at great risk. I use average true range to find them. The guidelines differ from market to market but are discussed in depth in Online Trading Academy’s Professional Trader course.
In a strong market, I look for bullish stocks in bullish sectors. Those will usually participate in the broad market’s advance the best. In the bearish market trends I will obviously look for weak stocks in weak sectors. Something that is universally similar about the stocks in any country’s market is that roughly 60% of the stock’s movement will be directly related to the direction of the broad market. 30% of a stock’s movement will be related to the direction of the sector that the stock belongs to. This holds true even when the stock is moving in the opposite direction of the market. Even though the stock may be trending opposite of the market the turning points in trend will still occur at the same time.
Now that you have found the stocks ready to move, you need to identify your entries and exits for the trade. Be sure to avoid chasing price and be patient with your entries. We need to buy only at demand and sell at supply. Keeping to this rule will reduce chances of loss and increase possibilities for success. When you find the stocks that will participate in the broad market advance and plan the trades properly, then you are in the best position for high quality trades and may even land the occasional big one!