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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
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