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How to pick a stock

Good volume and volatility are a must to gain from trading. While volume

should ideally be at least 500,000 shares, the stock should have a high beta, or

volatility. This means if the index rises 1%, the stock should rise by more than

1%. Those ho don!t understand the conce"t should see to it that the

difference beteen intra#day high and intra#day lo "rices of a stock is at least

$s 10.

dentifying the right stock and fixing a sto"#loss level is a must, says &aul. 'ne

must stick to the sto"#loss. Generally, sto"#loss is fixed at 1.5#(%, hich

means the stock is sold if it falls 1.5#(% belo the "urchase "rice. )ig traders

generally fix sto"#loss at about one#third of the ex"ected "rofit. *or exam"le, if

they ex"ect a stock to rise 10% in three days, they set a sto"#loss at a "oint the"rice falls by +%.

'nce you ero in on the stock, look at its volumes and "rice trends. Generally,

higher volumes ith higher "rice rise indicate an u"trend, but it should not be

considered a thumb rule. -olume is misread by a lot of "eo"le,- says /ohn

)arrett, an instructor at 'nline Trading cademy, hich teaches stock

trading. )ig volumes and large moves sometimes thro u" big to"s and

bottoms, says )arrett. This means if both volumes and "rices are increasing, it

may be the last leg of the rally.Stock Trends

dentifying trends is im"ortant. )ut ho do you s"ot a trend t!s difficult, as

the market never moves in a straight line. stock ill never fall continuously

on a given day and rise on another. -Generally, higher highs and higher los

indicate an u"trend, hereas loer highs and loer los mean a dontrend,-

says 2hrikant 3houhan, senior vice "resident, technical research, 4otak

2ecurities.

-ook at the trend. ook at nes related to the stock,- says 3houhan. *orexam"le, if the ru"ee is falling against the 62 dollar, it!s common knoledge

that technology com"anies ill gain.

nalysts and market ex"erts take the hel" of various "arameters to confirm if

a stock is a trade "ick. The most used are available in any technical analysis

softare. These include (00#day moving average, relative strength index,

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moving average convergence divergence, or 738, *ibonacci retracement

and candle stick "rice chart. The terms may sound daunting, but softare

available noadays makes technical analysis easy.

Moving Averages

'ne of the idely used tools is the (00#day moving

average. 9ou sim"ly have to "lot the (00#day moving

average on the "rice chart. When the "rice of the

stock rises above the moving average line, it!s a buy

signal, and hen the "rice falls belo the moving

average line, it is a sell signal. 'ne can also look the

50#day moving average or the 10#day moving

average. Trading is a game of "robability. 2o, you

have to arrive at your on methods to decide hich

"arameters suit you the best. n the gra"h, 7oving

verages, you can see the 2ensex movement com"ared to the (00#day moving

average of the 2ensex. The bron line is the moving average line. n *ebruary,

the line ent above the "rice bars and the 2ensex started falling. When the

(00#day moving average fell belo the "rice bars in "ril, the markets started

going u". n thegra"hic, the 2ensex is belo the moving average, indicating

bearishness. )ut this is :ust one "arameter.

Relative Strength Index (RSI)

$2 com"ares the magnitude of recent gains to recent losses to see if an asset

is oversold or overbought. $2 is "lotted on a scale of 0#100. Generally, if it is

above ;0, the stock is considered overbought and so one can look to sell it.

2imilarly, an $2 of less than +0 indicates the stock is oversold and can be

bought. n the chart, $elative 2trength ndex, you can see that $2 as near

(0 in 'ctober (011, signaling that

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average and the 1( day#ex"onential moving average. The slo line, also called

the signal line, is the nine#day moving average. 2o, the blue line in the chart,

738, is the fast line and the bron line is the slo line. With technology,

these calculations are automated and a gra"h gets "lotted at the click on the

mouse.

When the fast line crosses above the slo line, it!s a buy signal, and hen the

slo line crosses the fast line, it!s a sell signal. The chart shos that the 738

is the best ay to "redict the movement of a stock.

Fionacci Retrace!ent

*ibonacci retracement is based on the

assum"tion that the markets retrace by

a fe "redictable "ercentages, the bestknon of hich are +>.(%, 50% and

=1.>%. 2o, hen the market retraces +>%, it ill generate either a sell or a buy

call de"ending on the trend.

9ou have to "lot *ibonacci retracement from the "eak "rice. The softare ill

give the above mentioned retracement levels. When the "rice reaches the

+>.(% level and bounces, it means the "rice of the stock at hich the chart

"lots the +>.(% retracement is the su""ort level and you can buy. ?oever, if

the "rice falls belo the +>.(% level, you may look at the "rice at 50%retracement level as your next su""ort. The chart, *ibonacci $etracement,

shos ho the +>.(% retracement is orking ell for the $anbaxy stock.

S"pport and Resistance

9ou may hear or read technical ex"erts recommending su""ort and resistance

levels. )ut "lotting su""ort and resistance and finding it yourself is a sim"le

:ob. s you kno, "rices move in a ig#ag fashion and form los and highs.

su""ort is "lotted at the daily lo "rice and resistance at the daily high "rice.

*or exam"le, in the given chart, 3houhan says he sees su""ort of @,;00 for theAifty and if the index falls belo this, it may fall further to @,+00. ?e has

"lotted resistance at 5,1;; levels. Take a look at ho he managed to get

su""ort and resistance for the Aifty from the 'ctober ; gra"h, 2u""ort and

$esistance.