Prioritizing 5 ✋ Key Factors to Consider Before Executing a Trade: Learn the top 5 crucial factors you need to consider before entering a trade in this insightful article from MoneyWiseMind.
Are you someone who has entered into the stock market a few months ago or one -two years ago? Still confused how and when to trade to earn profits consistently like seasoned traders. You don't have a perfect trading set up. Always fighting with the market?
Here's a good news for you. We have come up with an interesting learning thread in which we have discussed some important points to keep in mind before planning a trade. Maybe it is an Intraday, swing trade or short and medium term investment. If you practice these stuffs mindfully you will be able to bring all the odds in your favour.
Alright! Then read on....
Stock market is an interesting place. It attracts many participants for its uniqueness. Stock trading can be fascinating. We have heard some terms used in stock market for analysis. Such as PE ratios, earnings forecast, CAGR, revenue in fundamental analysis of stocks. And many more like price action, trend following, trendlines, support and resistance etc, in technical analysis.
Out of these, which are to focus on and which are to ignore ?
So as to ignore all the unnecessary noises there are some vital things to consider before placing a trade and we can ignore everything else.
#1: An Effective Trading Setup
The most important thing you require a perfect trading set up without which you can not make even a single penny from the market. Without a trading system you are like a ship without a rader. The most vital question is how and when can you take entry?You can take the help of some chart patterns to develop your trading system perfect. Following are some chart patterns you can use to make entry.
- Hammer Candlestick Pattern
- Ascending Triangle Pattern
- Breakout Of Resistance With A Sound Build Up
- Bull Flag Chart Pattern
We will discuss about three chart patterns later.
#2: Clear Concept About The Overall Condition Of The Market
The stock market index has the power to identify whether the stocks prices will go up or go down. Because the index reflects the overall market sentiments and trend of the market. When the stock market is up that indicates participants are optimistic about the market, so stock are likely to go higher. Similarly, when the stock market index is bearish, the participants are pessimistic about the market, so the stocks are likely to head lower.
So, before placing a trade first determine the overall market trend, bullish or bearish. You only buy stocks when the market is bullish not bearish.
But how to know the market is bullish or bearish? For this follow this simple rule. Buy only when the market is above 200 day moving average or stay on the sideline with cash. However, this is not 100% foolproof as you will face many false or fake signals. But it is sure that you will be always at the right side of the market.
#3. Select The Strongest Stocks
So, the next step is to identify the strongest stocks. Strongest stocks are those which have appreciated the most in price over the last 52 weeks or at least over 6 months. That means high momentum stocks. If the market is in uptrend, you only look for buying strongest stocks. It is generally observed that stocks which are at 52 weeks high or all-time high always try to continue their upward trend for more time in future.
#4. Select The Stocks Which Are In Uptrend
Most of the time, it has been noticed that the strongest stocks which are already in uptrend try to keep their upward journey intact. Still, there is no guarantee of market. Sometimes, one or two bad news regarding recession, national and international geo-political events can create a panic in the market. So, the one simple rule you should follow only buy stocks above 200 Day moving average. We know that stocks above 200 DMA tend to go upward and below 200 DMA tend to move lower.
#5. A Perfect Exit Strategy
Now the most important question is how and when to exit the trade. You have everything in your favour with a perfect trading set up, strongest stocks in uptrend, the right point of entry. But if you don't have any perfect exit strategy, you won't be able to make profit. In order to exit with profit try to ride the winner using a trailing stop loss. If the price closes below 200 MA line you should exit the trade.
If you are a swing trader and want to capture a move in a swing you have to exit the trades soon as the opposite pressure comes in.
Now, we will discuss about some chart patterns which can develop your trading set up.
ASCENDING TRIANGLE CHART PATTERN
The ascending triangle is a bullish chart pattern created by price movements that allow for a horizontal line along the swing highs and a rising trend line along the swing lows. The two lines form a triangle. It is often called a continuation pattern as the price is likely to breakout in the same direction of the trend.
Here is an example how it looks like;
To make a long position (buy) in ascending triangle pattern one can place a buy stop order above the high of resistance. Stop loss will be kept below the low of the prior candle.
BREAKOUT OF RESISTANCE WITH A PERFECT BUILDUP
It is a bullish chart pattern that indicates the buyers are in full control of the market. It is generally observed that the price gets rejected from the resistance when it tries to retest that level. At a certain time, it forms a buildup at resistance with a small candles instead of getting rejection. It looks like tight consolidation. The larger the buildup, the higher the chance of strong breakout. Because, buildup at resistance means buyers are willing to buy at higher prices! There is a series of stop loss kept by short sellers also which if triggered, can intensify the buying pressure. Due to these reasons, a solid breakout can happen and you can buy when the price breaks out of resistance with a buy stop order above the high of resistance or according to your trade management.
Here's an example.
BULL FLAG CHART PATTERN
The bull flag chart pattern is a very effective one if you identify correctly. It's a trend continuation pattern that has two phases. First one is a stronger phase with a trending move and a weaker phase with a retracement move. Below is an example of bull flag chart pattern;
Trading the bull flag chart pattern is very simple. You can buy at the breaking out of resistance putting a buy stop order. Keep your stop loss at the lowest low of bull flag.
Conclusion: We hope this post will help you in planning a trade immensely if you practice mindfully. If you have more things to look for before placing a trade please share your thoughts with us.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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