Stock Market Variability and Trading
Stock variability is the basic principle behind for stock trading for a profit. If there is no stock variability, stock prices stay at same levels over a long period; it would not be fascinating for the perspective traders, investors and speculators for doing any trading/investment. In such undesirable scenario, companies would not be in position to mop up large funds for investments as required in projects. For keeping the participants’ interest alive in stock market, stock variability is must for trading and investment purpose.
Stock variability is caused by several reasons and factors having influence on stock prices of companies from their future earning perspectives. Ever changing business environment due to several factors like government policies regarding changes in tax structure, investment incentives in specified sectors, fiscal and monetary policies and other factors like company strategies, technological advancement, shift in customer preferences, social and political reasons, and global factors. Some of the factors causing variability are:
- Forecast of GDP growth rate
- Government fiscal policies and monetary policies
- Consumer confidence levels
- Foreign Exchange rates and FE reserves
- Government investment priorities and incentives
- Business cyclic phase like boom, recession, depression and recovery and global economic scenario
- Sector wise demand and supply gap
Stock variability will ever continue to exist and traders and investors must embrace this reality and learn techniques to use the stock variability for profitable trading.
For analysis purposes, technical indicators are usually used and these are shown in a graphical form above or below a security’s price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison, like Moving averages.A technical indicator offers a different perspective from which to analyze the price action. Others, such as stochastic, have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, technical indicators can provide a unique perspective on the strength and direction of the underlying price action of the security.
Use of Indicators
Indicators serve three broad functions- to alert, to confirm and to predict.
- An indicator can act as an alertto study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout.
- Indicators can be used to confirmother technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On–Balance-Volume (OBV) could serve to confirm the weakness.
There are several indicators in use today and also, technical analysis software programs come with dozens of indicators built in, and even allow users to create their own. Given the amount of hype that is associated with indicators, choosing an indicator to follow can be a daunting task. Even with the availability of several indicators, only a select few like MACD, ROC and Moving averages offer a different perspective and are worthy of attention.
Qualities of a good investor in share market
- Never overtrade
- Book profits regularly
- Cut loss making calls, follow Stop Loss
- Never wait for targets
- Stay away from event based trading
- Never trade on emotions
- Show patience and have discipline
- Does some research and study and draw conclusions
- Never play blindly in market
- Never trade on freely available advices and opinions as these are wrong almost all the time.
Technical Analyst (stock market)