The first, and the easiest, part of trading in shares is to take preliminary steps like opening a brokerage account, completing the paperwork, installing the trading software or app, and transferring funds into your trading account. However, knowing when and how to buy shares is probably the toughest and most challenging aspect of share trading. Read ahead for four useful tips that will enhance your chances of finalizing a profitable trade.
Technical analysis is the art and science of identifying patterns in the movement of share prices that can help the trader anticipate profitable trades in advance. The first step that you should take before buying a share, especially from a day trading or positional perspective, is to study the charges for trading patterns.
Chart patterns combined with other data indicators like average daily and weekly trading volumes and proportion of delivery trades as opposed to intra-day trades can help you take an informed decision when buying shares. Of course, patterns do not guarantee upward or downward moves. Therefore, it is advisable to consider other parameters as well.
A 20-day moving average indicates the price that buyers were prepared to pay to purchase the share over the past 20 days. A relatively longer moving average like the 100-day or 200-day MA is more reliable as compared to a 7-day average. You should study the moving averages to understand how to buy shares at the right time.
A share that has just broken its 200 DMA on the downside can hardly be called a good buying opportunity. Instead, one should look for shares with charts where the price is piercing the long-term moving averages on the upside.
Apart from fundamental factors, a share’s price is often affected by news related to the particular share as well as the general economy. A sharp fall below the 200 DMA caused by a negative news may be a great opportunity to initiate a positional long trade.
Of course, you should make sure the fundamentals of the company is strong and that the dip is merely an unwarranted overreaction. Combining technical analysis and moving average trend analysis along with the news-based impact will help you identify safe buying opportunities in the market.
Finally, make sure you study the company’s past results and analyze future forecasts before initiating a trade. Buying before a great quarter can help you enjoy superlative returns, especially if the stock is rerated by brokerages and analysts. Studying parameters like average delivery purchases being made can help you assess the level of investor interest in the scrip.
Keep in mind that trading is not a get-rich-quick gambling scheme. Even day traders and positional traders must adopt a patient and well-thought out strategy to minimize risk of losses and improve chances of earning the maximum profits.