It is said that you should not time the markets. However, earning profits in the stock markets is directly linked to the timing at which you enter and exit the markets. Your entry price and exit price in a trade cannot happen as per your convenience. It is a moving train which you need to catch at the right time.
Entering the market means executing the first order of the buy-sell cycle. When you first buy a stock with a plan to sell it later, this process is called a long position. The entry at the market while you are going ‘long’ is with a buy order followed by the sell order. The buy order should ideally be at the beginning of a potential rally or upward movement of the stock prices.
On the contrary, you can also sell a stock as the first move to enter the intraday markets. This type of move is called a short position. Entry at the market while you are going ‘short’ is through a sell order, followed by a buy order. The sell order should ideally be placed at the beginning of a potential downward trend in the price.
So how exactly do you know what is the right time to enter and exit the market? The answer to this question lies in your strategy. There are many guiding points associated with figuring out how you can best enter and exit in intraday trading to ensure maximum profit.
1. Enter according to the trend in the market
2. Figure out the entry right price
3. Enter with a stop loss fixed and exit at stop loss
4. Set viable and reasonable targets
5. Buy strong stocks going up
6. Sell weak stocks going down
7. Do not enter when markets are choppy
The first and foremost thing t remember when you enter the market is to follow the trend. Go long in the bullish markets and go short in the bearish phase. You should never defy the trend in the intraday markets because often the markets follow one particular direction if there is no sudden unexpected announcement or happening.
You should always buy stocks when the market is going up so that your asset value appreciates and sell it first when the market is falling, so that you can buy it at lower levels to earn maximum profit. However, if the markets have been continuously rising for a long time, then it is unwise to buy, since the markets are likely to turn overbought and hence, the priced may correct themselves.
Similarly if the prices have been falling for a long time, it does not make sense to sell, since the prices are likely to have been oversold and hence, will rise soon. The resistance and support levels help you in identifying these levels and spotting the right time to enter the markets.
Once you have understood the direction of the market, it is important to understand as to when would be the right time t take position in the market. In intraday trading, the market’s prices are usually highly volatile in the first half hour of the trading session as previous day’s orders get executed which cause volatility in the markets. After the initial volatility settles, the markets assume one particular direction, in which they trade for most part of the day. This can be a bullish move r bearish move or sideways move. You should pick your position at the beginning of the trend to make sure that the entire course of the trend takes place after you have entered the market. You should avoid entering the market at the end of the trend, since the trend will always reverse itself after a point.
Stop loss decides when to exit the market in times of loss. Just as much as entering the market at the right time is important, exiting at the right time is also equally important to avoid losses.
Your stop loss should be fixed alongside your entry price and should be entered at the time of putting in your first order. If you do not do so, then place a separate order to square off your position in case of losses. You should not wait for markets to recover and start moving in a favourable direction by avoiding stop loss. This would only lead to more losses in the markets.
Just as your stop loss should be fixed at the time of entering the markets, your target should also be fixed. Your strategy and you plan should clearly have a fixed mark for your targets. You should not wait too long for booking your profit, neither should you be scared of losing your earned profit and sell before the pre-decided target. Always fix a target and wait for that level to reach before squaring off your position.
Behaviour finance says that when a person is making profits, he becomes highly risk averse and books profit before the actual target is achieved. This should not happen and you should always place a target order as well for your intraday positions.
Your targets should be in proportion to your stop loss in a target to stop loss ratio of 2:1 or 3:1. A target to stop loss ratio of 1:1 is not an ideal one for intraday markets.
For entry and exit in intraday trading, it is extremely important to choose the right stock to bet your money on. If you want to make money in a bullish market, you should always bet your money on a string stock which has a high volume of aound20-30 percent and should make an entry when the price of such stock is low. There is a strategy of ‘buying on dips’ for stocks like that, since their general trend is considered bullish.
Hence when the markets are strongly and decisively bullish, you should bet your money on strong stocks which while their prices witness a pullback rally.
In a market which is decisively dominated by the bears or is going down, the stock which you should choose is the one which is likely to be affected most by the negativity going on and is weak. Stocks which are into sectors whose demand is not perennial, often get affected worse by any downfall in the economy. Such stocks should be identified and when the market conditions turn downward, such stocks should be sold first as there are chances that the prices of such stocks will most likely go down in face of any distress. Many stocks in the small cap segment and mid cap segments are considered weak stocks and have the potential of higher price fluctuations due to any change in economic condition or due to systematic risks.
For weak stocks like these, the ‘sell at peaks’ strategy is deployed, under which, the stock is sold at any small rise in its price, since its overall trend is bearish.
Apart from knowing when to enter the market, it is also extremely crucial to know when not to enter the market. In a volatile market when the direction of the market is not clear, you should stay away from trading. This is because if you take a position in volatile markets, and the trend of the markets finally settles in the opposite direction as desired, then you could face loss. Also, due to volatility, you may hit your stop loss even though markets are not decisively moving in the opposite direction. Due to these factors you should not enter the markets for intraday session during volatility.
Entry and exit levels and their timings require a great deal of understanding and study of the markets. Only after failing a few times can you fully grasp the right entry and exit basics. If you do not have time for the same, you can also seek help of a certified investment advisor to help you in deciding the entry and exit points in the stock markets.
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