trade talk

How to trade in a volatile market
Stock Market Basics

This has been a very tough year for the Stock Market. When I say Stock Market, I talk about the markets throughout the world, not just Indian Stock Markets. We are more or less following the trends of what is going on in the world. Factors ranging from decline in the crude oil prices, depreciation of Yuan and pressure on Chinese Economy, slowdown in the economies throughout the world, FED wows, selloff by the FIIs, to Internal factors like lack lustre quarter 3 earnings of Indian Corporates, Government’s inability to pass crucial financial bills to boost the investment and economy. Also, euphoria surrounding the markets after the Modi government was elected in 2014, finally settling down. How much the markets are influenced by these causes can be seen by the fact that BSE’s Sensex has lost around 6500 points till now from its peak in Market 2015 and has lost more than 2500 points since the start of this calendar year.

What is worse is, the current volatility in the stock market wherein one day the markets curelessly swing to one direction and the next day shifts the gears and swings to another direction. Specially 2016 has been a roller coaster ride for the stock markets and it has hurt the bulls and the bears alike. What we have also seen is all the technical and fundamental analysis going for a toss. This situation has hurt the retail traders the most. Traders who have purchased have lost their money and traders who have sold were also spared by the current volatility in the markets. Today, let’s understand how to handle the volatility in the stock market and avoid doing typical investment or trading blunders:

Do not leave open positions for too long if you are a trader : If you are a trader, avoid sitting on open long or short positions for too long. Given the current volatility this could prove a costly preposition in a highly volatile market. Though if you are an investor, you can ease and relax as volatility would not hurt you much.

Keep investing : The biggest mistake that retail investors do is to get out of the market if it comes down and enter back at higher levels. Remember every downfall in the market posts an opportunity for you to invest. Best strategy is to invest at lower levels and not get out of the market.

Avoid leveraged positions : Keeping leveraged position is the biggest mistake that people do in volatile market. Nothing hurts you more than a leveraged position in a volatile market. People are forced to square off their positions at a big loss because they could not pay the margin required to cover the Mark To Market. On the contrary, this situation would not arise if you do not use leverage. I am not against using leverage, it is a helpful thing. Only it should be avoided in volatile market conditions.

Diversify your portfolio : People should always diversify their portfolio based on industry and capitalisation. Never ever put all your eggs in one basket. So even if one stock goes down, others are there to support your overall portfolio.

Focus on good stocks : Try buying stocks of only good companies with great fundamentals after thoroughly researching about them. Do not go by tips. Also, do not invest in companies which are not fundamentally sound, however lucrative their shares may look. In case of sharp falls, bigger, better companies are able to recover than smaller ones.

Hedge your positions : Hedging is the best technique to keep you protected from extremely volatile market situations. Hedging may minimise your profits but will help you put a tab on your losses.

Keep booking small profits : Booked small profits are always better than bigger but notional profits. Booking smaller profits not only gives more weight to your capital, but also gives you a bigger cushion in case of extreme situation. Also, the moment you book profit, you have actually avoided a potential loss.

Hope this article will help you in formulating your strategy to handle the current volatility in the stock market in a much better way. Do not hesitate to put up any questions that you might have. We will be happy to help you out. Nothing can bring more satisfaction to us than seeing a big smile on the face of our clients. After all, at Moneypalm, we strongly believe in our philosophy – “Together We Grow”.

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Pratyush DixitConsultant - Digital Marketing and Content

Pratyush is a Post Graduate in Marketing Management and has a leadership experience of nearly a decade in diversified industry including Stock Broking. Having headed companies for over half a decade, Pratyush brings with him, rich Marketing and....

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