5 Tips To Get Higher Return From Share Trading
Trading unlike investing appears to be a high risk game and quite often it is. There is no tested method of earning higher returns in trading and it comes with practice in the live market environment. While there is nothing foolproof, here are five tips that can enhance the chances of being profitable.
Focus on a few stocks and build expertise
This is the cardinal principle of smart trading. You can successfully identify opportunities in a large array of stocks. You need to focus yourself on a small universe of around 10 or 15 stocks. There are two reasons for this. Share trading is quite multifaceted because you need to understand fundamental triggers, technical levels, news flows, F&O data, among others. You obviously cannot do that for a large number of stocks. The other most important aspect in share trading is that you are able to commit higher capital when the conviction level is much higher. That is only possible if you focus your time and energy on a handful of stocks.
Focus on the high momentum stocks
To make money in share trading you need to trade frequently. The whole idea is that you churn your capital rapidly and for that you need stocks with momentum. What do we understand by momentum? It is the speed and intensity of reaction of a stock to news, triggers or chart patterns. To cite an example, it is hard to trade frequently in stocks like Tata Power or NTPC because the momentum is very weak. These stocks make small moves over a long period of time. To enhance returns, you need to focus on the high momentum counters.
It is always better to trade in high beta stocks
This point may be related to the previous point but nonetheless, it makes sense to look at it as a separate point. Stocks are typically either aggressive or defensive stocks. Normally, stocks with a beta of less than 1 are called defensive stocks while stocks with beta greater than 1 are called aggressive stocks. Normally, trading and churning is much more profitable when you focus on stocks with a Beta of more than 1.5. That is when you actually get the benefit of momentum working in your favour. High beta works both ways, but that is where short side trading comes in handy, which we shall look at in the next point.
Learn to play the short side of the market
Normally, there is a degree of fear associated with short trading. In fact, short sellers are as important as buyers in the share market. Short sellers play on the selling side of the market when they have a negative view on the stock. You can sell in the cash market and buy back the same day or if you want a longer time horizon, you can use futures or put options. The short side of the market is also not too crowded as most retail investors prefer to stay on the long side. You can widen your share trading horizon by playing the market both ways.
Always trade with a favourable risk-reward ratio
You may wonder what is the role of risk in profiting from the share market. Ironically, managing risk is the key to earning higher returns. The risk reward is the return you can expect for every unit of risk. It is important for 2 reasons. Firstly, it helps you measure the risk properly. Secondly, you can decide on the size of your commitment to the trade based on the risk-reward ratio.
There is really no formula for being more profitable in the share market and you need to figure your own unique method. At least, you can plan to be more profitable!
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