How to identify best Trading Stocks?

To identify good Trading Stocks is one of the Hot Topics in Stock Market. Trading stocks are bought from short-term investment perspective or day trading. Let me clarify that i am not into day trading, but i do buy trading stocks with a horizon of up to 1 month. The objective to buy trading stocks is to make some quick money by identifying the upward trend or momentum in some stocks. Trading stocks may or may not perform well in the long run for investment purpose. Most of the times, the reasons for upward movements are not known. Traders can check the cues available in the market. The criterion to identify investment stocks and trading stocks is completely different. Short term trading is riskier compared to investment. You should know when to enter and when to exit. Also, it is critical to know what is the buzz in the Stock. A very recent example is of Essar Oil, the buzz was de-listing of the stock. Short term traders identified this stock at 150 levels and booked the profit at 190 level. By the time, retail investors reacted the stock was at 190 level and many small traders entered at around 190+ levels and these small retail traders are now stuck. Do remember that stock market does not generate any money. It’s a zero sum game, your GAIN is LOSS for some other investor or trader and vice versa.

As i mentioned in my post, 7 Blunders of Equity Investment that investors should avoid News Driven Stocks. Unfortunately, Trading Stocks are mostly News driven only. This news is sometimes in the public domain or privy to few big operators. The example is Sun TV, which i bought at Rs 290 and sold for Rs 320 in 10 days. Another category of trading stocks is distressed stocks. Traders find opportunity in such stocks to make some quick gains. The only caveat is that you should be sure of positive turnaround else you are gone. An example in my case is Sun Pharma, it collapsed 15% after management  commentary on weak profitability. After all Sun Pharma is Sun Pharma and i bought at Rs 815 level. The next day it reached 835 level. While most of the brokerage houses predicted levels of 750 to 770 but i played the gamble. Now same brokerage houses are predicting a level of 870 in a month or so. I took this decision based on OI (Open interest) data i.e. Put Call ratio at various strike prices. The most active call option was at Rs 860 and most active Put option was at Rs 800. In layman terms, there was a very high probability of stock movement between Rs 800 and Rs 860. In my case, the downside risk was Rs 15 from the purchase price and upside gain was Rs 45. Therefore risk reward of 3:1 was in favor of a BUY at Rs 815. I am not saying that all my calls are 100% correct, but i take very conservative and risk-free approach. You should always wait for the right opportunity. Let’s check how i identify the trading stocks

Trading Stocks – How to identify?

1. Volume: The most important cue is the change in volume of the stock. If there is a sudden increase in both volume & stock price then it should be on your radar. Let me clarify that i only consider delivery based volume to identify trading stocks. Another dilemma is when to take action. The first-day increase in volume and stock price may be a fluke. It is important to identify the trend. Therefore, i take an aggressive approach by putting a stock on my radar if there is an increase in volume and stock price for 2 consecutive days. In case, you are sure of stock performance like Sun Pharma then any sharp dip is trading opportunity. Besides considering delivery based volume, you should consider min 5 days average volume. Lastly, you should filter out stocks which are thinly traded i.e. traded volume for comparison purpose is less than 5 lacs. Initially, i burnt my hands by trading in such stocks as sometimes there were NO BUYERS after few days.

2. Avoid Circuit Stocks: After you identified and shortlisted potential trading stocks based on volume, you should filter the circuit stocks i.e. which are hitting upper or lower circuits frequently. It’s a misconception that you make good money in upper circuit stocks. Believe me, a majority of small investors like me burnt their fingers in such trading stocks. In order to make money in such stocks, you should be seasoned trader and know how to play well. Always remember that 1st objective is to protect your capital. We should take calculated risks rather being greedy.

3. Avoid Only Buyers/Only Sellers Stocks: You may observe the surge in stocks with only buyers. These trading stocks should be avoided at any cost. A stock may have only buyers today’s and tomorrow only sellers. Therefore, the case of only buyers doesn’t mean that stock has huge demand. It means that it might be operator driven stocks. I stuck in one such stock which i would not like to name.

4. Open Interest: Besides volume another parameter to identify best trading stocks is Open Interest data. It gives a lot of short-term investment opportunities. Basically, open interest data give a lot of hints on future price movement. You should check stocks with an increase in price, volume, and open interest. It shows bullish trend normally for short-term only. These stocks may not be good fundamentally or technically but can be good trading stocks. To be more precise in your trading, you can also check the current price/Last Traded Price against strike price for identified trading stocks or any news driven stocks. The lower the current price/LTP against the strike price, the probability is high to achieve strike price. You also need to check OI (open Interest) volume against current price & change in OI against the strike price. Therefore, strike price with high OI and the comparative lower current price is most probable future price target. This data keep changing on a daily basis therefore it is important to keep track of trading stocks so that you can exit at the right time. Though it is very complex from layman perspective but the safest bet is to check most active calls as i explained for Sun Pharma.

5. Avoid Penny Stocks: Though penny stocks are most lucrative for short term trading but i avoid trading in such stocks due to the very high risk involved. As a thumb rule, trading stocks shortlisted by you should not be of less than Rs 30 in value. These stocks are not worth investing or trading.

Concluding Remarks: In this post i tried to cover some of the parameters used by me to identify good trading stocks. I always believe that capital protection comes first. There is a difference between calculated risk and risk. The probability of loss by taking calculated risk is lower than taking blind bets. Lastly, it is advisable to do your own basic research before placing any bet. It’s a misconception that trading stocks are poor quality stocks. The opportunity also exists in quality stocks. Remember it is your money and you are responsible for any profit or loss. If you are not comfortable with trading stocks, you can always buy quality stocks after due diligence for medium to long term investment. The best scenario is to buy quality stocks as a trading stocks and once you see potential convert to investment stocks. Currently, i have similar thoughts for Sun Pharma.

Disclaimer: Among all stocks discussed in this post, i have a position in Sun Pharma. The objective of this post is only to create an awareness.and educating investors about the Subject matter. The views and opinion expressed on this website are my personal views and is NOT an investment advice/Stock Tips whether to buy, sell or hold the shares of a particular stock. All investors are advised to consult their investment adviser and/or conduct their own independent research into an individual stocks before making any decision. I am not responsible for any loss or implications arising out of any decision taken by the readers after reading my post.

Copyright © Nitin Bhatia. All Rights Reserved.