What separates an okay trade from an amazing trade? These are the boosters which when added on top of your trading strategy, can skyrocket your win rate in trading. A professional trader knows methods which can separate a good trade from an okay trade. Even if a stock is in your radar & is behaving as per your trading setup, this doesn’t warrant that you should take the trade. There are multiple things which the trader can look into to improve his/her trade selection. Let’s take a quick look at all factors before diving into the details.
- Big wicks
- Momentum
- Retracement Levels
- High volumes
- Support & resistance in higher time frame
Big wicks
A big wick is one of the most interesting things which can occur in a stock for a trader. To understand the importance of a big wick, lets understand how a wick is created. Here, we consider a wick towards the downside. The exact opposite happens when a wick is formed towards the upside.
A candle with a big wick towards the downside was once a highly bearish candle. All of those sellers got crushed by a big buyer who bought all the available stock at a discount. This provides us with two key information –
- Lot of sellers got trapped
- There is a big buyer in the stock
In such a situation, you generally want to be in the same direction as the big player because the big players move the markets, not retailers. An even better situation can be when you see multiple big wicks in the same direction which confirms the presence of a big player in the stock.
To learn more about the significance of big wick candles, visit this article!
Momentum
Momentum is an important parameter for traders. A trader is not only looking at stocks which have the capability to make money, instead they are also looking at the speed at which the stock can provide the returns. A faster return in the market is always obtained by staying in stocks which are showing a high momentum. This is especially true of intraday traders who do not have enough time to hold their stocks, since the trade needs to be squared off by the end of the day.
To identify high momentum stocks, we need to look at the speed at which the stocks have been moving in the previous few candles. For intraday traders, banking & financial stocks are generally highly volatile stocks which can move with a strong momentum. However, depending on the market conditions, different sectors can provide high momentum trading opportunities.
Retracement Levels
A key retracement level can provide a trader additional confirmation in his/her stock selection. Retracement levels provide a good opportunity to safely join the existing trend. Fibonacci retracement is a common method which is used by stock traders all around the world to find the levels of retracement. A professional trader understands that despite the momentum of a stock, a single sided move without retracement is rarely sustainable. To learn more about this, visit this article – Why stocks don’t move in a straight line?
Stocks typically move in a zig-zag pattern providing opportunities for a trader to ride the trend. A good retracement added on top of the stock which is fitting as per your trading strategy can provide an amazing opportunity to make money in the market.
High volumes
Volume represents activity by big players who have the capability to move the market. As a trader, we are only interested in following smart money. Their activity stays hidden during the trading day but they always leave their traces through volume. If there is a sudden increase in the volume of a stock, this shows that a big player has suddenly become interested in the stock.
If you are interested in shorting a stock as per your trading setup & you observe a highly bearish candle with a high volume, it suddenly turns your trade from an okay trade to a great trade!
Support & resistance in higher time frame
Higher time frame supports and resistances are a key level at which many traders have been interested in the past to perform a certain action. Let’s take a simple example. Suppose you are trading using the 15 min chart & get a good buy setup on a particular stock. However, when you try to check the 1 hour chart, you find that the stock is very close to a resistance! Should you still trade that stock? Probably not. Consider this chart at the 15 min time frame
It might seem like a good chance to go long on the stock.
However, the higher time frame (1 hr.) chart shows that the stock is approaching its resistance zone which might make your long position much riskier!
Higher time frame supports & resistances show us the regions where previously buyers and sellers have entered the stock. They show us the area where we can have a sudden change in the perspective of the market participants. Also, higher time frame supports and resistances are much stronger compared to lower time frame supports & resistances.
Conclusion
These 5 factors can help a trader boost his/her stock selection. These factors do not guarantee the success of the trade, instead they increase the probability of a successful trade. However, the final decision on trading depends entirely upon the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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