Article

Top 5 Trading Strategies to Deal with Fluctuating Stock Prices

11 Dec 2019

Stock market fluctuations are part and parcel of the trading game. Since the time the Nifty breached the 11,000 mark and the Sensex breached the 40,000 mark, there have been wild fluctuations in the index as well as specific stocks. The bad news is that fluctuations add to your risk of trading; irrespective of whether you are into online trading or offline trading. The good news, however, is that these risks can be managed. When markets are at valuations that are above the historical average, fluctuations are normal. Here are five strategies you must try applying on your stock trading platforms.

Stick to quality stocks at all costs

If you look at the stock markets from a longer term perspective, you will find that certain stocks like Hindustan Unilever or Nestle manage to provide greater stability. This is due to the fact that such companies have proved themselves quarter after quarter; both in terms of margins and growth. The more important take-away from this strategy is that you must avoid the allure of stocks that show high degree of volatility. Such stocks only add to your risk because such volatility could come from macro or micro factors. Sticking to the tried and tested names may make your portfolio a slow mover, but then this is the time to protect capital, more than anything else.

Shift from aggressive beta to defensive beta names

One good thing about online trading  is that you are the master of your trade and the stock trading platform allows you to shortlist stocks based on variables like beta. Normally, a stock with a beta above 1 is aggressive and a stock with a beta of less than 1 is defensive. Aggressive beta stocks tend to be more volatile than the index and you could run a higher risk on such stocks. The ideal strategy in these circumstances would be to shift your portfolio mix from high beta to low beta and ensure that the average beta of your portfolio is brought to below the 1 mark. This will help you protect your risk better.

Use volatility to add good stocks in bad dips

One instance we can think of is stocks like HDFC Bank and Bajaj Finance. Both the stocks have leadership position in their respective segments and score over competition in sustaining growth, holding margins as well as controlling NPAs. That explains why such stocks have managed to bounce back with every correction. For example, when the NBFC crisis struck in the middle of 2018, even Bajaj Finance fell in tandem. But this was the one stock that recovered its losses and more. As a smart investor, your strategy must be to accumulate such quality stocks that dip more than they deserve.

Volatile markets is a good time to restructure your portfolio

It may sound ironical but heightened volatility is the time to actually clean up your portfolio. For example, you may be overexposed to mid caps in your portfolio or you may be overexposed to a particular sector. This could have been a conscious strategy or due to the sector outperforming. This is the time to take opportunistic profits off the table and reallocate these stocks to the more stable names. It is hard to get big returns when markets are at a high, but by restructuring your portfolio, you can certainly ensure that the damage is limited if the market works against you.

Don’t forget to use the power of hedging in volatile times

Hedging is not just about the use of futures and options but also the use of other asset classes. If you have a large cap portfolio, it could be safe but you can still hedge with put options on the Nifty. If your portfolio beta is less than 1 then you are likely to gain more from the put options than you lose in portfolio value. These profits can work as a cushion. Secondly, look at other asset classes. Gold can be a good protection in times of global uncertainty. Also, India now offers alternative products like REITS, INVITS and Bond ETFs. Look at these alternatives to hedge you overall risk in the market.

Volatility is the time for you to focus on the shuffling of your equity portfolio and also to look at varied asset classes. You are surely in business!

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Top 5 Trading Strategies to Deal with Fluctuating Stock Prices

11 Dec 2019

Stock market fluctuations are part and parcel of the trading game. Since the time the Nifty breached the 11,000 mark and the Sensex breached the 40,000 mark, there have been wild fluctuations in the index as well as specific stocks. The bad news is that fluctuations add to your risk of trading; irrespective of whether you are into online trading or offline trading. The good news, however, is that these risks can be managed. When markets are at valuations that are above the historical average, fluctuations are normal. Here are five strategies you must try applying on your stock trading platforms.

Stick to quality stocks at all costs

If you look at the stock markets from a longer term perspective, you will find that certain stocks like Hindustan Unilever or Nestle manage to provide greater stability. This is due to the fact that such companies have proved themselves quarter after quarter; both in terms of margins and growth. The more important take-away from this strategy is that you must avoid the allure of stocks that show high degree of volatility. Such stocks only add to your risk because such volatility could come from macro or micro factors. Sticking to the tried and tested names may make your portfolio a slow mover, but then this is the time to protect capital, more than anything else.

Shift from aggressive beta to defensive beta names

One good thing about online trading  is that you are the master of your trade and the stock trading platform allows you to shortlist stocks based on variables like beta. Normally, a stock with a beta above 1 is aggressive and a stock with a beta of less than 1 is defensive. Aggressive beta stocks tend to be more volatile than the index and you could run a higher risk on such stocks. The ideal strategy in these circumstances would be to shift your portfolio mix from high beta to low beta and ensure that the average beta of your portfolio is brought to below the 1 mark. This will help you protect your risk better.

Use volatility to add good stocks in bad dips

One instance we can think of is stocks like HDFC Bank and Bajaj Finance. Both the stocks have leadership position in their respective segments and score over competition in sustaining growth, holding margins as well as controlling NPAs. That explains why such stocks have managed to bounce back with every correction. For example, when the NBFC crisis struck in the middle of 2018, even Bajaj Finance fell in tandem. But this was the one stock that recovered its losses and more. As a smart investor, your strategy must be to accumulate such quality stocks that dip more than they deserve.

Volatile markets is a good time to restructure your portfolio

It may sound ironical but heightened volatility is the time to actually clean up your portfolio. For example, you may be overexposed to mid caps in your portfolio or you may be overexposed to a particular sector. This could have been a conscious strategy or due to the sector outperforming. This is the time to take opportunistic profits off the table and reallocate these stocks to the more stable names. It is hard to get big returns when markets are at a high, but by restructuring your portfolio, you can certainly ensure that the damage is limited if the market works against you.

Don’t forget to use the power of hedging in volatile times

Hedging is not just about the use of futures and options but also the use of other asset classes. If you have a large cap portfolio, it could be safe but you can still hedge with put options on the Nifty. If your portfolio beta is less than 1 then you are likely to gain more from the put options than you lose in portfolio value. These profits can work as a cushion. Secondly, look at other asset classes. Gold can be a good protection in times of global uncertainty. Also, India now offers alternative products like REITS, INVITS and Bond ETFs. Look at these alternatives to hedge you overall risk in the market.

Volatility is the time for you to focus on the shuffling of your equity portfolio and also to look at varied asset classes. You are surely in business!