Every time a trader makes a random entry in the stock market, he gives up the advantage that his particular trade set up has. The only way one can make money in the stock market is by catching the right entry price of a very strong trend.
After determining the entry price, It is also important to make sure that your losses are not too big. This can be done by practicing proper risk management techniques and doing position sizing.
Risk management will help you define the maximum capital that you would be willing to risk per share to take your trade. Generally the Risk to Reward ratio is taken at a minimum 1:1 where your potential loss is the same as your potential profit. Anything less than that makes the trade not profitable as your risk is far greater than your reward. Position sizing on the other hand will help you determine the total number of shares you should to buy or sell in the particular trade considering your risk to reward ratio.
Once you have entered the trade, it is also important to exit the trade at the right time and not let emotions get the better of you.
If any one of the above is missing, then a perfectly good trade set up can also go completely against you. This method may seem like too much of work but with time and consistent efforts and discipline it will give you the right results.
There are many terms people use nowadays when it comes to the
Stock Market like Fundamental Analysis, Value Investing and various other investment strategies but that have been worked upon and perfected by experts over years.
On the other hand, a very common and simple way of getting the perfect entry and exit is by using the study of Technical Analysis. This tool helps traders in ways which the fundamental study of the stock cannot.
Technical analysis is very commonly amongst used by Intraday and Swing traders as it helps them not only in the entry and exit but also in picking the right stock for the trade.
Many people have a perception in the stock market that the magic formula to equity investing is all about investing in the right stock. And while that logic is true to some extent, it is not entirely true.
For example, Mr X bought Maruti at Rs. 10,700 thinking that it will go up to 25,000. He believed that Maruti is a fundamentally sound company and there is no reason why the share price will not go to Rs. 25,000. So Mr. X took an entry position in Maruti at Rs. 10,700.
He then watched the stock price go up and then go back down all the way to 6,000. Maruti being a fundamentally strong stock may go up to 25,000 but the point is that if he would have had his technical study in place, he wouldn’t have to go through all the anxiety of the rising and falling stock prices. So it’s safe to say that Mr X did some research about the stock but he did not plan an entry for it. His fundamental study was strong but he missed out on his technical study. If he would have used Technical Analysis to find an entry price, he could have made his entry at a much lower price and been at ease when the stock prices rose.
Like Mr. X, various people go through different experiences in the stock market. Some would say that he picked the wrong stock, he should have picked something else and could have made a fortune out of his investment, but not everyone is lucky that way. Picking the right stock is not going to guarantee you a profit but determining the correct entry in that stock and even more important the perfectly timed exit will help you grow in the stock market.
The real magic formula in the stock market is something that all of us have, but only some have the courage to follow – consistency
Success is about using your own intelligence to create a trade set up using various technical analysis techniques and being consistent and disciplined.
