Indian Shares - Choosing A Trading Strategy
Having the correct trading strategy is essential for sound investment in the the Indian Stock market, or any other market or business for that matter. Trading Indian shares without a well thought out trading strategy can be very risky indeed. You need to know beforehand what action to take when certain market conditions appear.
How To Choose A Stock Market Strategy
Learning about the predominant trading strategies will provide you with the foundation to develop your own trading style or to provide you with a knowledge base so you can better choose an effective fund management approach. The most popular stock trading strategies are day trading, swing trading, momentum trading, growth trading and value investing. Following is an overview of each strategy.
In the strictest sense, day trading refers to buying and selling stocks in the same trading day. This strategy means that profits are realized on the same day and that any potential, adverse market variations which may occur overnight are avoided. Apart from stocks, other financial instruments which lend themselves to day trading are stock options, currencies, and a multitude of futures contracts. A day trader may complete anywhere from one to dozens of trades within a single day. Because of the very short term nature of day trading, it is vital to maintain a vigilant approach throughout the day. Whilst day trading can be very profitable there is also the potential to incur large losses in particular if one has poor risk, money management or discipline.
Momentum in the stock market refers to the speed with which a stock changes its price and the volume of stock associated with that change. Momentum trading is trading on the basis of the indicated change in momentum. Essentially, traders identify stocks that are moving in one direction coupled with high volume and then enter the trade. Whilst momentum trading can be used to trade stocks on a short term basis, over a longer time frame (say a year) it is possible to identify stocks which undergo much larger gains even as much as 500% or more.
Swing trading generally involves buying a stock at near its low point and selling at a higher point. Swing traders hold a stock for anywhere from a few days to two or three weeks, and trade the stock on the basis of its intra-week or intra-month price oscillations. Swing traders normally only trade stocks that are being currently actively traded, most commonly large-cap stocks. Some examples of large-cap stocks include Intel, Microsoft, Apple and Cisco Systems. Unlike the momentum trader, the swing trader is looking for short terms oscillations which tend to occur when the market is more stable, neither rapidly advancing nor declining.
Value investing centers around understanding the value of a stock in relation to the company fundamentals. The fundamental analysis of a business involves analyzing its financial statements, how well it is doing, its management and competitive advantages as well as its markets and competitors. Value investors identify stocks which they consider to be under priced and will therefore grow in price. This is more of a buy and hold strategy since it is the market which ultimately determines the value of a stock and whilst the stock may be undervalued in principle it may take some time for the market to adjust its value perception.
Unlike value investing, growth investing depends on finding companies which display better than average growth. In the past, the potential for growth was considered to override an over-valued price, based on company fundamentals; consider the dot-com boom. Nowadays, it is considered more sensible to couple a reasonable price with the potential for growth. Taking advantage of stock news sources to identify emerging companies and companies undergoing positive growth is an important part of this strategy.
Value investing, day trading, momentum trading, swing trading, and growth trading are all proven methods. However that doesn't mean that they will reap profits all of the time. The saying, "Jack of all trades, master of none" is worth considering when chosing a stock market strategy. No matter which strategy you choose, you will always have the potential for loss. Early losses when using a new strategy should not be the determining factor in whether or not to remain with a particular strategy. Select your strategy based on your capital base, your available time, your "trading personality" including how well you tolerate risk and then decide to master your selected trading strategy.
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Mark Crisp is the creator of the Stress Free Momentum Stock Trading System. Stay in tune with the latest trading news and information at www.daily-stock-pick.com
The Indian stock market is possibly the world's best investment and will be for many years to come , this article is one of many which may assist your trading. SharesDaily.in does not necessarily endorse the contents of this article.
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