Making money in stock trading is all about accuracy and reward-risk ratio! Most professional traders who consistently make money in the stock market either have a high accuracy or a high reward-risk ratio (or a combination of both). Even though there are some strategies which focus on higher reward-risk ratio compromising their win rate, most traders focus on a strategy which has a high accuracy & moderate reward-risk ratio (1.5:1 or above). Let’s learn how a trader can increase his/her accuracy in stock trading.
1. Multiple confirmations
There is always a probability involved when trading stocks & no strategy can be 100% accurate. However, the win rate of a trader can go up a lot higher if he/she has the capability of filtering out medium/low quality trades from high quality trades. Multiple confirmations can allow a trader to avoid taking up trades which have a higher probability to fail.
Some traders use a very simple strategy for trading but run into the problem of finding too many trading candidates. Let’s suppose that you trade only based on the moving average. Moving average is a trend based indicator which can tell a trader about the potential direction of the stock movement. There are other indicators such as momentum based indicators and volume based indicators. Adding these indicators to your trading strategy can act as a double confirmation which will increase the probability of a trade to turn into a winning trade. If you want to learn a simple intraday strategy explained in under 90 seconds, watch our video on “STRATEGY 1750”.
Multiple confirmations can avoid a trader from taking bad trades, even if it reduces the number of potential trades. However, there is a catch! Using too many indicators or an extremely complicated strategy can also lead to over-analysis which can also lead to losses to a trader.
2. Look for supports / resistances
Support and resistances provide a trader the information of potential supply & demand zones for a stock which can be extremely helpful in providing double confirmation to a trader. Regardless of your strategy, it is always advisable to mark nearby supports & resistances which the stock has made in the previous few candles. Having a nearby support can prevent you from taking a short trade in anticipation that the price can bounce from the support. Similarly, a well placed support can allow you to enter a great long trade by providing further confirmation to your strategy. The support and resistances should not be used by themselves to enter trades. Instead, they can complement your other indicators such as Moving averages, Bollinger bands, RSI, MACD, etc and act as a confirmation towards your trade.
3. Reduce trading in choppy markets
Choppy markets are the bane of a stock trader’s existence. They are extremely unpredictable & lead to wild movements in the price of a stock. To learn more about trading during choppy markets, visit this article!
A simple method to increase your trading accuracy is to reduce the number of trades which you take during a choppy market. The goal for a trader should be to not lose everything in the choppy market which he/she has earned during the trending market. Trading can be reduced in two ways – reducing the quantity of stocks or reducing the number of trades. If a trader chooses to reduce the quantity of stocks, then the risk will automatically go down (so will the reward). The trader can also reduce the number of trades which will directly reduce the risk which the trader faces.
This will not improve the accuracy of your strategy, although it will help you to lose a lot less money during the choppy times thereby improving your overall trading accuracy.
4. Trade as much as possible during trending phases
Just like a trader should reduce his/her trading during a choppy market, the exact opposite is true for a trendy market. A stock trader should be ready to pounce on an opportunity when the market becomes trendy since it can provide very high accuracy trades. A trader’s goal is to earn a lot of profit during a trending phase & protect his/her capital during the choppy phase. Clear trends will allow almost all strategies to work a lot better! If you want to learn about an intraday trading strategy which is a trend based swing trading strategy, please watch the video on 1750 Strategy!
5. Avoid looking at the index price
Many traders make the mistake of constantly observing the Index price even though they are trading in a specific stock. Eg. if you are trading the stock of Reliance Industries, there is no need to track the Nifty 50 index! There are many days in which a particular stock behaves very differently from the index. Novice traders make the mistake of exiting their trades, if they are in the opposite direction of the Index in the hopes of losing their capital. Every single stock has a different story which the chart is telling to the trader. It is wise to only listen to the stock chart & ignore other noises.
6. Price is the best indicator!
Even though different successful strategies use different indicators, the best indicator which is available to the trader is the stock price! It is the only indicator which is available in real-time & doesn’t lag the reality (unlike other indicators). Some traders make the mistake of following multiple indicators but forget the most important thing in a stock chart – price! Even if all the stars align & every single indicator is giving you signals, never enter a trade without a favourable price. Paying a closer attention to price can significantly improve a trader’s accuracy.
Conclusion
A trader’s goal should be to increase his/her accuracy in trading to make bigger profits in the stock market. These steps can be used to improve your trading accuracy & can be integrated to any trading strategy. However, the final decision of the 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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