Hey friends, welcome to Stock’s Knows. This is the 3rd article of Technical Analysis, in today’s article, we will know Basics of Trading.
What is Trading?
Trading is a method to make a profit from buying and selling shares or security or currency during the shorter time frame. There are different types of traders in the market. Risks, rewards and time frames are different for different types of traders. We can classify mainly three types of traders shown in the market.
1)Intraday Trader:
An intraday trading is a method to get profit from changes in the price of shares during the day. An intraday trader needs to close his opened position before closing the market, whether it is a profitable position or losing position. Intraday traders are players which play in direction of Market.
Intraday traders always try to book their profit quickly or cut loss quickly. Though intraday trading removes the overnight risk of carrying shares, it is not the easy task to do.
Intraday traders always try to book their profit quickly or cut loss quickly. Though intraday trading removes the overnight risk of carrying shares, it is not the easy task to do.
2)Positional Trader:
Positional trading is like day trading but positional traders do not square off their position before closing the day but they take their position in any security and hold for some days to the week and try to get profit from changes in share price during some time period.
Although it consists of overnight carrying risk, as per my view in positional trading you have some more time as compare to intraday to take decisions as per your risk or reward capacity. They book profit or cut losses as per their plan on basis of the movement of share or security price.
Although it consists of overnight carrying risk, as per my view in positional trading you have some more time as compare to intraday to take decisions as per your risk or reward capacity. They book profit or cut losses as per their plan on basis of the movement of share or security price.
3)Short term or Swing Trader:
Short term or swing trading is trading for a time period of 1 week to 4 weeks. A swing trader always tries to get profit from market swings during some weeks. Swing trading also carries Overnight holding risk but it is less risky as compared to intraday and positional trading as per my view.
They always buy at low and sells at high. Risk and reward in swing trading are different from both above types of trading. Though all types of trading are risky but if you trade strictly as per your plan, you will get profit in the long run.
They always buy at low and sells at high. Risk and reward in swing trading are different from both above types of trading. Though all types of trading are risky but if you trade strictly as per your plan, you will get profit in the long run.
Some important things to decide while trading:
1)The risk to reward ratio:
The risk to reward ratio is first important thing while trading. The risk to reward ratio is defined as: How much reward you expect per share while taking risk of Rs.1 per share.
If you expect Rs.5 per share as a reward while taking risk of Rs.1 per share your risk to reward ratio will be “1:5” (Risk: Reward or Risk/Reward). Higher the reward compares to risk better it is. A ratio of 1:5 is better than 1:1 ratio.
For different type trader risk to reward is a different but minimum risk to reward ratio is always 1:1 because minimum reward while taking risk of Rs.1 per share is not less than Rs.1 per share.
If you expect Rs.5 per share as a reward while taking risk of Rs.1 per share your risk to reward ratio will be “1:5” (Risk: Reward or Risk/Reward). Higher the reward compares to risk better it is. A ratio of 1:5 is better than 1:1 ratio.
For different type trader risk to reward is a different but minimum risk to reward ratio is always 1:1 because minimum reward while taking risk of Rs.1 per share is not less than Rs.1 per share.
2)Target:
Target is a level near that one need to book full or partial profit. Booking profit is very important because the market is always volatile and if someone waits for more and more profit and not book profit, it is possible that market may reverse its direction and profitable position will become losing position.
To avoid those scenarios one needs to set the target and continue to book at least partial profit. In above condition trailing stop loss will help you.
To avoid those scenarios one needs to set the target and continue to book at least partial profit. In above condition trailing stop loss will help you.
3)Stop loss:
In any type of trading cutting losses is as much important as booking profit. STOP LOSS is a level beyond that one need to square off his position to cut the loss as per his risk-carrying capacity.
As per trader’s risk to reward ratio and on the basis of charts, stop loss must be decided. Because of news, events, and volatility, the market can change its direction any time.
To protect himself from that volatility and to limit the losses, one always need to place stop loss orders.
If you are in buy side, your stop loss level would be just below the nearest support level, if you are in sell-side your stop loss level must be above the nearest resistance level.
There are many support and resistances possible in any price range, one needs to decide that where to put stop loss as per his risk to reward ratio and as per his trading style.
There are different stop loss levels in the same position for Intraday or Positional or swing trader.
In trading, many people because of emotions prevent to cut losses earlier and think the market will reverse to give him reward so they hold their positions but an ideal trader do the exact opposite of it, he always tries to cut losses quickly and try to run his profitable position.
Thinking that market will reward me because so and so reason is not good quality of a trader.
Accepting whatever real condition is, the best quality of a trader. If you want to be profitable in trading you need to do like the ideal trader.
As per trader’s risk to reward ratio and on the basis of charts, stop loss must be decided. Because of news, events, and volatility, the market can change its direction any time.
To protect himself from that volatility and to limit the losses, one always need to place stop loss orders.
If you are in buy side, your stop loss level would be just below the nearest support level, if you are in sell-side your stop loss level must be above the nearest resistance level.
There are many support and resistances possible in any price range, one needs to decide that where to put stop loss as per his risk to reward ratio and as per his trading style.
There are different stop loss levels in the same position for Intraday or Positional or swing trader.
In trading, many people because of emotions prevent to cut losses earlier and think the market will reverse to give him reward so they hold their positions but an ideal trader do the exact opposite of it, he always tries to cut losses quickly and try to run his profitable position.
Thinking that market will reward me because so and so reason is not good quality of a trader.
Accepting whatever real condition is, the best quality of a trader. If you want to be profitable in trading you need to do like the ideal trader.
Types of STOP LOSS:
1)Trailing stop loss:
Trailing stop loss is moving stop loss which moves in favor of the position as price goes in favor of the opened position.
If you have bought some shares at 200 and your stop loss is at 196, suppose price moves from 200 to 204 then you need to increase stop loss from 196 to 200, in this condition your trade is protected and you won’t lose anything.
After sometime price further increases to 208 then you need to increase your stop loss to 204, in this condition your profit of Rs.4 per share is locked and in any market condition you will get minimum that profit. This is known as trailing stop loss.
If you have bought some shares at 200 and your stop loss is at 196, suppose price moves from 200 to 204 then you need to increase stop loss from 196 to 200, in this condition your trade is protected and you won’t lose anything.
After sometime price further increases to 208 then you need to increase your stop loss to 204, in this condition your profit of Rs.4 per share is locked and in any market condition you will get minimum that profit. This is known as trailing stop loss.
No. CONDITION STOP LOSS PRICE
1) Just Bought 196 200
2) After some time 200 200
3) More time passed 200 208
2)Fixed stop loss:
After understanding about trailing stop loss, you will think people need to always use trailing stop loss, but it is not true.
Sometime trailing stop loss will give unnecessary losses, because in the highly volatile market it is possible that price of purchased share suddenly decrease and hit your stop loss and quickly increase from that level and hit your target, but your position was squared off and you will get the unnecessary loss.
So trailing stop loss is a good idea but not in all cases. In the highly volatile market, you have to increase your risk, need to find strong support below that you can put stop loss, to increase the probability of hitting it.
In that case, you can not trail your stop loss. This type of Stop loss is known as strict or fixed stop loss.
Sometime trailing stop loss will give unnecessary losses, because in the highly volatile market it is possible that price of purchased share suddenly decrease and hit your stop loss and quickly increase from that level and hit your target, but your position was squared off and you will get the unnecessary loss.
So trailing stop loss is a good idea but not in all cases. In the highly volatile market, you have to increase your risk, need to find strong support below that you can put stop loss, to increase the probability of hitting it.
In that case, you can not trail your stop loss. This type of Stop loss is known as strict or fixed stop loss.
This was some basic and important things of trading.
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