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Our Trading Approach PDF Print

Simplicity is Our Goal

The market is full of data, ideas, and trading strategies. Traders track moving averages, stochastic oscillators and relative strength index among other things. Many suggest trading on news. If the technical indicators or trading off news worked, everybody would be rich.
           
Trading off news or indicators do work if taken in the right context, but we have noticed that our best trades are when enter and exit positions based on support, resistance and price direction. Before we jump into support and resistance trading, let us explain what we mean by "right context."

For instance, the relative strength index (RSI) will give an overbought signal when the stock price has gone up. Most people will take this as signal to short the stock. However, if the stock is on a strong up trend, it will continue to rise, leading to substantial losses for the shorts. The RSI will continue to show an overbought position all through the time the stock is rising. The stock will only stop rising is when it hits resistance. So in such a situation one could use the RSI in an oversold position to buy the stock.

This is true of several technical indicators and after a lot of experience, we have feel that support and resistance works best. We may look at indicators only for secondary confirmation but never as a primary reason to enter a trade.

How we do it?

Support and resistance of a stock is the same as demand and supply of the stock. When the price of a stock falls to a certain level there will be a high demand for the stock, which supports the price and prevents it from falling further. By the same token, when the price of a stock rises to a certain level there will people wanting to sell at a profit, creating a high supply of the stock. This prevents the price from rising.

When there is high demand for the stock not only does the price stop falling, it begins to rise. The same is true of the supply side. When prices reach an area of high supply not only does the price stop rising, but it begins to fall.

Now comes the most important part of the equation, which is price direction. Before taking a position we identify the price direction of a stock and also its relative strength or weakness. If a stock is moving up we identify an area of resistance and buying points along the way. Once the stock nears resistance we sell it and wait for a signal to see if the upward trend will continue or reverse, before taking more positions. The principle is true for falling stocks.

We also look at strength or weakness of the stock relative to the market. If the stock is stronger than the market we buy it and vice versa for weaker stocks. We also look at the trend of the market before buying or selling a stock. There is no point buying a strong stock at support if the market is falling. It's better to wait.

These are quite a few elements that you need to pull together and you ask, "How is this simple?" We make it simple by doing all the hard work and picking stocks for you with entry, exit, and stop loss targets.

Do we look at fundamentals?

As long as a stock moves within its previous price range we look at suppport, resistance and price direction alone. However, when prices go to new highs we look at fundamentals and some technical indicators. We may also look at fundamentals for new stocks or sectors with a lot of upside potential. Solar stocks is one such area. But otherwise we always have previous price behavior to guide us.