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picking the best trading opportunities Picking the best trading opportunities Michael Kodari illustrates how to scan the market and pick the correct trading opportunities and what key technical indicators you should look for to give you an entry and an exit point. 36 YOURTRADINGEDGE MAY/JUN 2013 picking the best trading opportuities I n a rallying market where the ASX200 is looking to reach 5500 points in 2013 and even new market participants are taking out margin loans to take advantage of this positive sentiment, new trading opportunities arise in many different sectors. The question still looms; what quantifies a ‘good’ trading stock and out of more than 2000 companies listed on the ASX, how do I find the best 20 to add to my watch list? Keeping in mind that every investor has their own methods and indicators to identify opportunities, there are some key factors which I think every trader should consider. Although the average trader may use the basic technical indicators like Relative Strength Index, MACD, Bollinger Bands with respective parameters, I believe it is more of an art to identify the start of a new trend and involves not only analysis on past data but also years of experience. In scanning through the market and compiling your watch list of stocks to trade, the first rule of thumb for any trader is to identify high volume, liquid stocks that are volatile with its price fluctuations. Linc Energy (LNC), Lynas Corporation (LYC) and Medusa Mining (MML) fit this criteria. I look for unusual volume activity and then inspect its source; perhaps an announcement may have been released or there were changes in macroeconomic factors. The next step would be to analyse if the unusual volume is reflected in the stock price. When the price action is correlated with the market depth backed by high volumes, it may signal the start of a strong trend, giving rise to a potential trading opportunity. Yet the question still remains; when is a good entry and exit point? The answer lies within your investment time horizon. For the day traders out there who are willing to monitor orders, volume and momentum from 10am to 4pm, they should enter into an opportunity when the rate of change of the buyers with respect to sellers has hit a turning point whereby the buy orders are increasing at a faster rate. In practice this exact point is very difficult to identify. Good entry points would be purely dependant on momentum swings in market depth and this is where experience comes into play. In order to avoid catching a falling knife, my rule of thumb is to always wait for confirmation that an uptrend is fully established before I enter into a stock. I would need to see signs of an increasing rate of buyer volumes to be comfortable with the trade. For the traders with a longer time horizon, an initial analysis of the Relative Strength Index and MACD would be appropriate to indicate a suitable entry and exit point. To detect a viable entry point, I would look for the shorter term exponential moving average to cross the longer term exponential moving average from below with the RSI at the 30 level. An exit point can arise when the shorter term exponential moving average is at least 0.03 more than the longer term exponential moving average with the RSI hitting above 70. At times when trends aren’t as strong, stochastic oscillators with an upper level of 80 and lower level of 20 should be used in place of the RSI to determine when a trend is coming to an end. If we look at the Gold Producer Northern Star Resources (NST), these technical indicators can be analysed to identify suitable entry and exit points. NST’s Price, MACD and RSI Charts can be analysed for the May-June period in 2012: According to MACD, a trader could have bought NST stocks in late May when the stock was trading at $0.64, the MACD (blue) crossed above its Exponential Moving Average (red), when the RSI was relatively low at 33.33, suggesting the stock was oversold. A good exit point would be when NST hit $0.94 when the MACD was well above its Exponential Moving Average, whilst the RSI was at 87.67. The MACD and RSI provided excellent entry and exit points during the period in concern, earning the trader a 47% return in just over two weeks. There are many other technical indicators that a trader can use such as Bollinger Bands, On-Balance Volume, Stochastics; the list goes on. However it is important to avoid over complicating matters as a trader. The most successful traders go back to the basics and make a qualitative judgement on entry and exit points based on macroeconomic sentiments, price actions and volumes. We’re now in the midst of the reporting season and trading opportunities are emerging from various sectors. I am focusing on the Energy and Materials sectors for high volume tradeable opportunities. So make sure to put in your stop losses, take into account market expectations for company earnings, and most importantly, stay disciplined. YTE MAY/JUN 2013YOURTRADINGEDGE 37