How trading works

Before understanding the chart patterns, indicators and the system we need to have a very basic understanding about how trading works. We are assuming that you have basic understanding of chart reading and knowledge about trading.

How the market moves?

When the market moves upside or downside we call it a trend. The faster the movement, steeper the trend and more the volatility. To book profits in trading you have to look for stocks which are trending, be it uptrend or downtrend. Never trade on stocks with a side wise trend.

What makes the stock move? That's the million dollar question. The stock only moves when there is a supply demand imbalance. Supply demand imbalance is the very primitive theory of economics, where either the supply is much more than the demand or vice versa. For example, if there are buyers who are willing to buy a stock on a particular day(s) with a buying to selling ratio of 4:1 the stock price would move upwards with high volume. The same would happen if the selling to buying ratio is 4:1. With huge volume the stock price would go down.

So, we can see from the above example the imbalance have to be supported by two things i. Price action and ii. Volume. These are the only two things that matters in the stock market and nothing else. So, trading a stock with high volume having an imbalance exhibiting the price action is key for success in trading.

Regarding volume, one thing must be kept in mind that this is imperative while you are scalping. Since you are into a position for a few seconds or couple of minutes, volume would help the price to move in your direction. Whereas, in a positional or swing trading you might encounter periods with low volume, but you have ensure that the market bias should be in your favour. Since these trades may last for sessions, you might not have extreme volume throughout, especially during short sell.

Who creates the imbalance?

Big institutions with tons of money are the people in the market who make the stock move. These institutions are also called the smart money as they are the people with proper knowledge and information and make smart investments. These are hedge funds, mutual funds, big personal investors, big financial institutions etc. When the deal, they deal in numbers and thus the stocks move in their trading direction with high volume.

So the one and only golden rule in trading is "TRADE WITH THE SMART MONEY".

How to identify a profitable trade?

A profitable trading trade must have the following components inbuilt into it:

1. Trend: You should always trade when there is a trend, which may be upward or downward. Trend is your friend. Never trade in sideways or choppy market. Another very crucial factor that has to be kept in mind is that, always setup a trade at the beginning of the trade or when the trend is about to setup. Never chase a trend when the price has moved substantially. You will burn your hands badly and get trapped.

2. Momentum: This measures the strength of the trend and also helps you to diagnose at what stage of the trend you are, i.e. initial or the exhaustion stage. So always we need to enter a trend with momentum at its initial phase.

3. Volatility: This refers to the price change, i.e. how quick the price changes. The more volatile the stock is, the quicker is the price action and more risky it is, which can lead to heavier loss in no time. Without volatility, there will be very little price movement which is of no use to a trader. Hence, while entering a trade we should look for volatility of moderate strength and not extremely volatile or non-volatile in nature.

4. Volume: Volume and market bias is required. Volume would help the market to move and the market bias will keep the trend moving during low volume phases. Remember, volume increasing and the market bias reversing is a signal of reversal and can signal for exit.

Thus while setting up a trade, we need to look into the above mentioned parameters and conditions to emerge as a profitable trader. The TradeWizard system will help you to exactly identify the same and not only that will do the most vital operation for you, which is Risk Management.

We will cover some other important aspects of trading in the next session which should always be kept in mind while trading.