Tips on how to trade in the stock market during elections

You will find a lot of high-flying projections and analysis about the outcome of elections; and most would have little connect with ground reality.

Apr 21, 2019 07:04 IST India Infoline News Service

Let us start off with a caveat here! We are talking about trading from a short term perspective. This does not in any way impact your long term investments or your financial plan. They have a much longer time perspective and are not supposed to be impacted by events. The focus will be on your trading strategy; which is a lot more short term in nature. Here are a few handy tips to apply as you trade ahead of the elections.
 
Tips to trade during the elections
  • Learn to separate the noise from the cues. You will find a lot of high-flying projections and analysis about the outcome of elections; and most would have little connect with ground reality. Don’t base your trading strategy on such noise. Most of this noise is marketing clutter and have little insights to offer. You must be specifically wary of the clutter on the mass media and also on the social media.
  • This is the time to listen to the markets. One of the basic rules of trading is that trend is your friend. The market always has a story to tell and when the market behaves against conventional wisdom, it is trying to tell you something. As a trader, try to look out for what the markets are trying to indicate through its movements rather than what experts are trying to tell you.
  • Take the markets one day at a time. Election periods are normally quite volatile. In fact, volatility could arise from a number of factors. These include pre poll surveys, post poll surveys, voting patterns, government announcements, etc. It is hard to take any view beyond a few days. In a highly dynamic market scenario, keep your positions as flexible as possible.
  • Keep an eye on the Volatility Index (VIX). It is the best indicator for traders of likely directional movements in the market. The VIX tends to fluctuate wildly during the election time. Between now and 23rd May the market gyrations could be huge. It is VIX that is the best lead indicator to ratify your directional positions.
  • There is nothing like insurance in volatile markets and the insurance comes in the form of stop losses. One of the strategies you should use in the election period is to set narrower stop losses and shorter profit targets. This will substantially reduce your trading risk in the market in these times.
  • Use derivatives effectively during election time. In fact, there are different ways to use derivatives in these times. For example, if you are positive or negative on a particular stock, try and play through call and put options rather than through stocks or futures. Your losses can be managed a lot better with the help of derivatives. Similarly, if you are holding on to cash positions; try to lock in profits with short futures. You can also profit on the downside without taking any directional risk.
  • Keep a scenario analysis done and ready to coincide with the election season. You can simulate various kinds of scenarios here. For example, if there is a majority NDA government, what stocks to buy and how to handle trading allocation? How to trade markets if there is a multi-party coalition that is likely to form the government? Also you must have a plan in case the government formation gets into limbo and the actual process drags on.
 
The idea of a trading style sheet ahead of elections is that this is normally the most volatile period. We have seen how the Nifty hit lower circuit on counting day in 2004 and upper circuit on counting day in 2009. A good trading strategy can help you effective benefit from such sharp movements.

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