The discipline of Technical Analysis hosts a multitude of trade plays for varying market conditions. Whether it is a bull, bear or a sideways market, there is always a particular play fit for the situation.
For those starting their journey in stock trading, it is not advisable to hop from one type of play to another. The reason being is that you are bound to make plenty of mistakes on plays you are not familiar with. As such, it is best to carefully pick a trade play that suits your risk profile and lifestyle. This allows you to get consistent results in the long run and allows you to build confidence as you place bigger amounts in the market.
In this post we will be showing basic trade plays for every market condition so you analyze and decide which one best suits you.
Focusing on Mastery
I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times. - Bruce Lee
It was the great Bruce Lee who emphasized the importance of practice and mastery to achieve impactful results. The same grain of truth is same in stock trading. When real money is on the line, executing trade plays with little confidence and familiarity will always end up in damaging losses. If you care about your hard earned money and your mental health, it is always mandatory to focus learning a strategy that will allow a higher degree of success over time.
As you practice a trade play appropriate for you, you'll develop the skill in executing it properly. When this depth of mastery is achieved, consistent profitability in the market becomes a reality.
Narrowing your Choices
There are many things to consider when choosing the right trade play. As a basic template, we will list the mandatory factors needed to guide your decision making.
1. Current Market Condition
Each market condition requires a different approach.
Bull Market: Momentum Play, Breakout Play, Bounce Play, Swing Play
Bear Market: Bounce Play, Position Play, Swing Play
Sideways Market: Bounce Play, Position Play, Swing Play
2. Risk Appetite
Each trader have varying tolerance in Risk. In this context, this means that each trader can only handle a degree of volatility that they are accustomed to. For example, a very volatile (wild price swings) play may scare most inexperienced traders and low volatile (slow moving) plays maybe boring to some high risk takers. With this in mind, a trader needs to be very clear on the expected volatility that a trade may encounter.
High Risk: Breakout Play, Bounce Play, Scalping
Medium Risk: Swing Play, Momentum Play
Low Risk: Position Play
*The amount of risk in this context is tied to volatility, which is the speed and range of price movement over time.
3. Time Horizon
Let's face the truth. Most aspiring traders wanting to earn big in the market are too busy with their work to even monitor the market. When this is the case, placing their hard earned money on fast moving plays will mean big losses if they cannot monitor it actively. This now puts emphasis on clearly defining your time horizon before even placing your money on the market.
Short Term: Breakout Play, Bounce Play, Swing Play, Scalping
Medium Term: Swing Play, Momentum Play, Position Play
Long Term: Position Play
Dissecting Commonly Used Plays
To introduce you to some basic trade plays, here is a sample list with technical explanations. Note that there are dozens of other plays out there. But for the sake of brevity, we will be focusing specifically on the basic ones for this post.
1. Swing Play
A Swing play is the most common choice amongst traders due to its simple and straightforward setup. You buy as the price bounces at key support and sell as the price is rejected at key resistance. When the upside is big enough, a profitable play can be made.
The price chart above shows a basic Swing play setup. A mandatory requirement for any Swing play is a clear point of support and resistance. When both support and resistance is respected, a Swing trader can gauge the upside range if it is viable for a Swing play. Generally, an upside of 8-10% is already a viable Swing. Any less and the risk you are taking may not be worth it.
Entry: Swing traders will enter as the price bounce at the key support level. A higher high candle must follow the bounce the next day.
Exit: Sell as the price encounters selling pressure near the resistance level. You will notice this in the board lot as a huge padding at the resistance price level. If the price level cannot be broken, the price will naturally pull back to support or create a new support entirely.
2. Momentum Play
A Momentum play is driven by strong and consistent institutional buying. The strategy here is to buy high and sell higher. This is because the price will almost never pullback when buying pressure is strong.
The price chart above is a classic example of a Momentum play. Momentum traders will often use the EMA9 indicator to gauge the point entry. You can see that the price consolidates above EMA9 for a brief period of time and surges up with a big spike in volume to create another consolidation at a higher price. This will go on as long as buying is sustained.
Entry: Momentum traders will enter during the consolidation phase above EMA9 or at the breakout of the consolidation.
Exit: Profit taking levels for Momentum plays is usually on a trend reversal. This may show in the chart as a sharp price breakdown below EMA9 with a big spike in selling volume. A bearish divergence may also appear as a signal to completely sell the position.
3. Breakout Play
A Breakout Play is a brief phase within a Momentum Play. It is driven specifically by an above average spike in buying volume that allows the price to break a key resistance level. Traders who prefer to profit quickly from a spike in price will prefer to just trade the Breakout move rather than waiting for the whole Momentum setup to complete itself.
The price chart above shows two breakout plays. You can clearly see how the price made a consolidation from its sell off. During the consolidation, a huge spike in buying volume sends the price on a breakout from its initial resistance. After which, the price made a higher base consolidation and made another breakout move that is supplemented again by a surge in buying volume.
Entry: Breakout traders will enter during the breakout candle. The signal will usually be the big spike in demand that completely eats up the wall of sellers at the resistance level.
Exit: Profit taking level for Breakout plays is usually set at the next key resistance. If that resistance level is broken as well then traders are inclined to hold until it is rejected on the succeeding resistance level.
4. Bounce Play
A Bounce play is defined by a falling stock price that reverses as it encounters a huge demand in buying. The point of reversal is what we call a Bounce point. If the demand is sustained, a stock price coming from a bounce may experience a brief rally before profit taking kicks in.
As a risk management precaution, it is best to go for Bounce plays of fundamentally robust companies that may have experienced a sell off merely because of overall market weakness. When market conditions improve, these stocks will be the first to bounce.
The chart above is a perfect example of a sizeable Bounce play after a steep panic selling scenario. You can see that a bullish pin bar has formed just when RSI surged below 20. When a stock is fundamentally sound, you can expect a price bounce when RSI hits 20-30.
Entry: Bounce traders will enter only when the price has started to bounce near a multi year support level and is near RSI 20-30. If it breaks down lower, then Bounce traders will cut their losses immediately.
Exit: The profit taking level for Bounce plays is very specific. Bounce traders sell near EMA9 or MA20, depending on which level it encounters selling pressure.
5. Position Play
Unlike the other plays which are largely based on price action and volume, a Position play is driven by fundamentals. For a stock to be considered for a Position play, the long term growth has to merit enough upside so that the long waiting period will be justified. As such, choosing a stock fit for this play will entail substantial fundamental research. Institutional demand also needs to be considered since they are the ones who will push the price over time.
The chart above is a monthly timeframe view of fundamentally solid bluechip stock. Due to general market weakness, stocks like these which are exposed to the index will pullback sharply as well. These pullbacks are the prime opportunities that Position traders are looking for in order to accumulate more shares.
Entry: Position traders have an accumulation range. Since the time frame is bigger, the weekly or monthly time frames are the usual references to reveal the multi year level supports and resistances. Each time the stock dips to the multi year support range, a buy entry is made. This demand long waiting periods in between.
Exit: The profit taking level of a Position play is tied closely to its fundamental value. This may take several years depending on the company performance and institutional demand.
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