Volatility measures the average movement that the stock gives in a day. High volatility means high movement low volatility There are thousands of stocks to trade in the stock market but, not every stock is a good stock for trading. Few things should always be kept in mind before selecting the stock to keep the probability of profit high.
1. High liquidity
A trader should avoid the stock with low liquidity. Low liquidity stocks have wide differences in the bid and ask price that makes it difficult to enter and exit at the right level. Such stocks can also give violent movement and can take away your stop loses easily. Therefore, select the high volume stock only for trading.
2. High volatility
means low movement. A trader doesn’t want to deal with the stock which doesn’t moves. So always check the volatility of the stock before entering any trade. Prefer the stock with daily average volatility of at least above 1.5% . You can check the volatility figures from the derivative section of any stock on the website of nse bse. For example, Tata steel has daily volatility of 1.7
3. A clear trend
Trend is the friend of a trader. Choose the stock which has a clear trend. It can be either bearish or bullish trend. Avoid the stock which is not showing any trend in the last 30 days.
4. No news flows
Any sudden news flows can make the stock go violent in any direction. Before taking the trading position make sure there are no news events are due like quarterly results, election results, RBI policy meet, merger acquisition etc.
5. No trading position in the first 60 minutes
In the early morning, the number of participants in the market is very less. Early morning movements are usually not reliable. So take your trading position only after 60 minutes from the market opening.
6. Don’t go against the market
If the market is trending downwards prefer trading on the sell side and if the market is trending upwards prefer trading in an upward direction. Going against the market trend can be injurious. There is an exception to rule, there are some sectors that can do well in the bearish market. Like weak rupee is bad for the overall market but good for the IT stocks. You can choose such kinds of sectors for trading if you want to go against the trend.
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 2010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.