State of the Market|Reading the Psychology of the market

There are many fish in the lake and it isn’t necessary to catch every fish that swims by in order to be successful. In fact, it’s only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).

Opportunity Evaluation Template

Trading is a serious business, and as a trader, one of the most challenging aspect most of us face - selecting the right stock to trade. As a trader, the biggest challenge - among so many opportunities, which is the best stock to trade? And most of the times, we have no idea. Trading most of the times is purely based on First come first serve basis; and the filter - “gut feeling”.

In order to solve this problem, I developed a template for opportunity evaluation. I hope you all will find it useful.

1. Trading Setup - Does the stock have an attractive chart pattern?

	Price-Volume breakout		Swing Trade - Pullback
	Collapse in Volatility		Gap-up at the bottom
	Cup and Handle		Support at 200 day ma
	Moving Average cross-over		Trading at 52 week high

2. Does the stock meet the price-volume requirement?

As a general rule, volume should increase as trend/pattern develops. Hence, stock should qualify these two volume questions -

What is the kind of volume on which a pattern is getting formed. Higher the volume, better it is. (Chart Pattern Volume > 2 x of 10 day moving average)

Average Trading Volume > 0.75 lakhs in value terms.

3. Does the stock have a history of making tradeable moves?

There are lots of stocks which make one-day or one week move and then turn sideways for good period of time. There is no fun in initiating a trade on such stocks. Such trades only add to frustration and opportunity cost.

	Yes		No
Comments

4. Is there any underlying theme/fundamental story in the stock?

Market participants love stocks where there is a strong underlying fundamental story/niche theme in the stock.

	Yes		No
Theme/Story

5. Does the stock have any sectoral support?

Trading is always a top-down exercise, unlike investing which most of the times is bottom-up. It has been seen that if a sector is making a move, sooner or later, all leading stocks of the sector will make the move.

	Yes		No
Sector

6. What is the market risk at current juncture?

The biggest risk in the market - market risk. So, understanding the current phase of the market is key to success. There is no fun being  long on any stock if market is in bear phase. Initiating a trade in bullish/neutral market is profitable. It is only the bearish phase in which one should be extra careful in initiating a long trade. One should also be aware of what kind of stocks do well in bearish phase of the market. Example - Defensives like FMCG, IT and Pharma may do well in bearish phase of the market.

BULLISH

Bearish

Neutral

Remember, one should never try to fight with the broader trend of the market.

7. Final Analysis - Does one see a potential for big price move in the stock?

If yes, then what is the risk-reward equation?

In this section, one needs to write what kind of move one envisages in the stock and what kind of target one is aiming in the stock. Also, one needs to document that at what price level, one will start questioning the trade and at what point, one will take the loss. No matter how well you plan, market has a habit of doing funny things and despite all the good plan, stock may not move as desired. Having a well defined exit plan always helps a trader get out of losing trade much before it becomes painful to exit.

Conclusion

Opportunity does not travel on any schedule and you have to just watch for it.

These seven questions do not guarantee success but ensure that one commits only to high quality trade and not get excited at every opportunity that comes by. I know these things are difficult to act, but when followed are very rewarding.

Do let me know your feedback on the story or any idea you have on refining this methodology/ template

Disclaimer - The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers.