Identifying Trade Opportunities

Having a successful trading system requires a mix of different cogs working together in harmony to achieve successful outcomes. At the very beginning of this system is identifying companies, commodities, or currency pairs to trade. Finding ‘in play’ opportunities can be a challenge and take time to understand.

Volume

Volume is the key to identifying many successful trading opportunities. A shift in the relative volume either to the up or downside can indicate that an influx of money is trying to either enter or exit their position. A shift in relative volume is usually characterised by a large volume bar that is well above the average volume traded of the stock. Large changes in volume may indicate a shift in sentiment in a stock which is also useful to identify reversals and signs of exhaustion. Learning to understand how relative volume plays a role in indicating sentiment is a valuable tool for any trader.

The below image shows two clear examples of shifts in volume, with one to the upside and one to the downside.

Stocks at 6 month and 12-month highs or lows

The adage, ‘Buy Low, Sell High’ may be an effective strategy for investing, however for short-term trading, this can often be fraught with danger. Such is the psyche of the market that perhaps the better strategy is to buy ‘Buy high, sell higher.’ This proposition can be effective because of the concept of ‘FOMO’ within the market. When a stock’s price begins to rise the emotional response of ‘Fear of missing Out’ tends to play a large role in the movement of the price. Buyers begin to panic buy, shifting the price higher, which further increases the price.

Therefore, stocks trading at 6-month and 12-month highs can act as a signpost that there is substantial interest in a stock. This process also works in reverse for stocks there that may provide good short opportunities.

Sector-wide movement

Strong movement within a specific sector may also be indicative of stocks that are in play. If a specific industry or sector such as Oil, Tech, EVs or others are rising, stocks within that sector will tend to follow. Therefore, analysis of how an industry is performing may help identify trading opportunities. For instance, if oil prices have risen the previous day/night oil stocks may make good trading opportunities the next day.

‘Trading the news’ and Macroeconomic factors

Macroeconomic factors or ‘trading the news can be an effective way to find stocks that may be in play. Companies who announce the news to the market can often provide great opportunities to trade as the market must come to terms with the value of the announcement. General earnings announcements and acquisitions are just some of the periodic and common events that can have a big influence on share price movement.

An event such as the Covid pandemic and geopolitical issues such as war or trade disputes can act as a catalyst for the price of equities, commodities, and FOREX. For example, when China announced it was slowing down its economic growth it had a direct effect on Australian mining companies as big Australian mining companies use China as a large importer of their products. Similarly, the recent Russian and Ukrainian war has had a massive impact on the global markets. Commodities such as oil, natural gas, and gold boomed with a great deal of uncertainty and volatility surrounding the conflict. Astute traders should be aware of how the news and macroeconomic factors can push certain stocks higher and lower.

Traders should be attentive to the things that can help identify trading opportunities, as this can greatly improve the efficiency of the trading system.