Your trades depend a lot on how you choose which stocks to buy. When you invest in the stock market for a short time with the goal of getting better returns than other government programmes by buying good stocks, there are a lot of things you need to think about before deciding which stock to buy.
And figuring out which factor is the most important can help you choose a plan. A stock market strategy is your plan for how you will trade and invest your money in the markets. It can be based on basic or technical research, events in the news, or any other similar method. Here, we’ll talk about some common but effective ways to pick the right stocks for short-term investments on the stock market.
Five ways to choose stocks for short-term investments
1. A plan based on moving averages
The average price of a stock over a certain amount of time is what is called the “moving average.” Moving average can be 15, 20, 30, 50, 100, 150, or 200 days, for example. The moving average is usually shown on a chart as a line that slopes up in a bull market and down in a bear market. Most of the time, moving averages with a longer time period are called “slower,” while moving averages with a shorter time period are called “faster.” When these two lines meet, they make a signal to buy or sell, which can be used as a strategy for picking stocks.
On a stock chart, for example, if the 50 DMA line crosses over the 200 DMA line from below, it would be a good time to “Buy” the stock because it has more room to go up.
2. Based on the way the economy works
This is a more basic way to choose stocks to trade in the short term. Every business that sells a seasonal item has a clear pattern to its business. In India, for example, paint companies see a rise in sales around Diwali because it’s a time when people clean and decorate their homes, the weather is good for painting, and wedding season follows the holiday season.
So, sales go up for paint companies around October, November, and December. For short-term analysis, this type of analysis, which looks at a company’s business cycle, sales, profits, etc., can be used to choose stocks.
3. The Strategy of Going With the Flow
People know that many stocks on the market follow the trend of the stock market. You can also use these as short-term investments when the markets look like they are about to go up. This can happen right after a downturn in the markets, when there hasn’t been a big change in the markets’ underlying structure. In these situations, a good way to make money is to choose the stock that matches the index.
4. Know the levels of support and resistance
This is also a technical way to choose stocks, in which you figure out and map the price range between the stock’s highest and lowest prices. This can be useful for holdings that only last a short time, like a week or two. These two levels will be the stocks’ “support” and “resistance” levels, and they can be used to make short-term trades.
5. How to Use Candlestick Patterns to Find Turns
This is another way to choose stocks for short-term trades based on technical analysis. In this, you follow candlestick patterns to look for a change in the current trend. Simply put, reversal means going in the opposite direction. Since most stock markets have only two fixed directions, up and down, a reversal strategy looks for when a stock is about to change its direction from up to down or down to up.
A candlestick is basically a chart made up of shapes that look like bars and have lines on top and bottom. These lines, called candles, show how the price of the stock has changed over time.
A candlestick chart shows how the price of a stock, derivative, currency, or commodity changes over time. In a candlestick chart, the “candle” is made up of the information about the “open,” “close,” “high,” and “low” for the time the candle was made.
A fixed order for the candles can help you figure out when the price of a stock or security will turn around. There are many reversal patterns, such as the bullish morning star, bullish hammer, shooting star, three-white soldiers, bullish harami, etc. These patterns are signs that stock prices will change, and you can use them to trade in the direction that the change will happen.
You need to choose the right instrument as well as the right strategy for short-term investments. Sometimes shares are the best tools for your trading plan, and sometimes futures and options are better.
Another important thing to think about when making trades is how willing you are to take risks. You should never trade more than you can afford to lose, and you should try to practise good trading hygiene, which basically means using a stop loss and following the basic rules of investments.
You can also get help from a SEBI-registered investment advisor if you want to invest in the markets for a short amount of time. This person can show you the best and most appropriate options for you.