How to spot the best trading opportunities

Trading in the stock market can be very tricky. You need to be quick in making trading decisions, especially in a volatile market. Let’s look at the ways in which you can spot good trading opportunities in the market.

Watch out for strong stocks

As a trader you must identify strong and weak stocks. Strong stocks are those that move in the direction of the trend but with much more vigor than the overall market. Weak stocks are those that move with the market trend but at a slower pace than the market in general.
You can start by identifying the trending sectors and then pick outperforming stocks within those sectors. Check for the stocks that have given higher returns as compared to peers and the broader index.
However, during a sideways or consolidation in the market, volatility is low and hence, there are fewer trading opportunities.

Research well

Conducting proper research on stocks you want to trade is an important task for you as a day trader. This includes keeping a close watch on any major corporate actions in the company such as earnings, dividends, etc. Such events have a major impact on the stock price, and you must train yourself to spot such positive or negative surprises well before others to be able to cash in on the sudden price movements.

Focus on a small set of stocks

It is important for you to understand the price patterns, trends and behavior of the stocks you want to trade. It is advisable to trade only with a few stocks. These could be just some select stocks or a set of stocks that you may find comfortable to trade. A small number increases your focus on each of the stocks on your list and eases the process of researching and tracking them. Some traders also prefer trading only in indices.

Keep an eye on the news

You should be aware of all the necessary information and day-to-day developments that impact stock prices. It is crucial to have a sight of all major important economic, political, national and international, micro and macro factors that impact your shares.
Some of these developments are analysts’ estimates of the stock based on the earnings performance. The quarterly earnings performance of a company attracts a lot of attention from stock market analysts. They share their views on the stock based on the company’s performance against their estimates. A positive view from analysts could be stock price accretive and vice versa. You may find an opportunity to trade after the earnings announcement and analysts’ call.
Economic data such as GDP growth data, Union Budget, RBI monetary policy, inflation, industrial output and other macroeconomic events impact stocks across sectors. These news events provide a decent trading opportunity for traders to act quickly.
Moreover, share prices also witness movements due to crucial international developments. For instance, a rise in international crude oil prices impacts the domestic companies in the oil and gas sector.

Focus on timing

Trading opportunities can also be spotted according to the time. Volatility in the stock market is high during the first hour and last hour of trading. If you have a greater risk appetite, you can try to make the most of this volatility.

Use tools and indicators

In the earlier modules, we learned how support and resistance, RSI etc. can be used as effective tools in trading.
Stock prices tend to remain within the support and resistance levels for a time period as these levels act as invisible barriers. Breaching these levels can mark the beginning of a new trend. You can consider buying a stock when it trades near support levels and can sell it when it hovers around resistance levels.
The Relative Strength Index or RSI enables you to find out whether a stock is overbought or oversold. RSI values range from 0 to 100. A value that is closer to 100 means that the stock may be overvalued and headed for a downward correction. An RSI value closer to 0 means that the stock is oversold and there is a good chance that there could be an uptrend in prices.
Identifying breakouts is another way. When stock prices breach their support or resistance levels and enter a new trend, it is called a breakout. You can take long positions when the stock breaks its resistance, while a short position can be taken when the stock price falls below the support level. We will learn in depth about breakout in the next module.

Find the right trading platform

While all the above factors will help spot the right opportunities, it’s also crucial to choose the right trading platform. A good platform will enable you to identify quick trading opportunities and cash in on them. Make sure that the trading platform offers you different technical and trading tools, research and charts with a good level of security besides reasonable cost.