A trading strategy is a methodology backed by logical reasoning to make profitable investments in the stock market. A good strategy results from detailed research and analysis of the asset one is planning to invest in.
However, taking a step back, the primary need is for the investors or traders to hold a Demat and Trading account and incur the Demat account charges associated with it. Traders cannot carry out any investment and trading activities, in the Indian markets, without having a Trading and Demat account.
Demat account opening online is also an option provided by all the major brokerage houses.
Random trading strategies vs. Technical strategy
Table of Contents
Let us understand the primary elements differentiating the two and how they can affect profits.
- When to Enter a Trade
Amid stock market volatility and continuous price movements, it is essential to develop proper trading strategies to maximize your profits through the invested capital. Random strategies may work once in a while or in the short term. However, there may not be a sound foundation for their implementation and following the same plan, the next time may result in losses. Technical strategies help in the creation of a well-defined and systematic plan, which you can follow to achieve your goals and maximize profits. Technical strategies use specific indicators that determine the most appropriate entry and exit points in a trade.
- Historical analysis
Technical strategies in trading facilitate a deeper and more accurate understanding of a stock’s past performance. For instance, if you wish to buy a specific stock, you can make use of the technical strategies to understand how the stock has performed historically or responded to corporate events, earnings releases, profitability, economic data, etc. It helps you develop a deeper understanding of the company’s historical performance before investing your money. On the other hand, random strategies may not give a thorough understanding of a stock’s characteristics or historical performance.
- Dealing with price actions
Technical strategies generate trade triggers that better understand how traders deal with fluctuating prices. For instance, if a company’s stock price exceeds the 200-day moving average, a trade trigger would help you identify the trend to take timely action. Random strategies may help in specific situations. Markets, by nature, can be very uncertain. Random strategies would not provide a caution for identifying price trends or stock patterns.
- Forecasting future trends
Technical strategies can forecast future trends of stocks. You can use multiple indicators to indicate how a specific stock is expected to move in the near future. This makes you better prepared for the trade. However, random strategies may not help much with forecasting future price movements.
- Learning
Technical strategies consider numerous factors while analyzing stocks. If you incur losses through your strategy, you can learn from your mistakes and make notes such that you do not end up repeating the same mistake. Random strategies, on the other hand, may help you earn profits but could also magnify your losses. There is not much of a conclusion that you can draw while implementing random strategies.
- The Exit Point
Similar to the entry point, investors need to understand when the suitable time is to exit a trade. Understanding when to exit helps investors in protecting or hedging their losses. Technical strategies make use of several indicators that can indicate exit points much more effectively than random strategies. For instance, a stock is experiencing severe losses, and it may appear as the right time to exit the specific trade. However, your experience in technical strategies might suggest that a trend reversal may be around the corner, and a little bit of patience could get you sharp profits.
