Navigating Volatile Markets: Expert Strategies for Successful Equity Trading

Stock markets can witness such drastic movements in short periods. This might sound scary if you are new to equity trading, especially when stock prices drop! However, there are ways to protect your money and achieve your financial goals. 

Let's discuss some expert strategies for navigating volatile markets and handling the ups and downs effectively in equity trading.

What is Market Volatility?

Let’s begin by understanding what market volatility is. 

Market volatility refers to the rapid and significant price movements in the stock market. This may appear like a risk, especially when you’ve invested your hard-earned money in the markets. However, you can also look at it as an opportunity to enhance your portfolio and use the price movements to your benefit. 

Market indices, like the Sensex and Nifty, are used to gauge market volatility. These indices represent a collection of major stocks and reflect overall market trends. For example, the Sensex tracks 30 well-established companies listed on the Bombay Stock Exchange (BSE). The Nifty 50 tracks 50 major companies on the National Stock Exchange (NSE). Whenever you see significant swings in these indices, it indicates market volatility.

Market volatility can arise from various factors. Some of the reasons for market volatility in the last couple of years include RBI announcing interest rate changes, political events like the recent Lok Sabha elections or global events like the Russia-Ukraine war.

Now that you know what market volatility is, let's understand the strategies to tackle it.   

Have a Trading Plan

A well-thought-out trading plan is essential for success in equity trading. It doesn't have to be anything fancy or complicated. You can begin by simply noting down your investment goals and risk tolerance. 

Once you have outlined these, you can set the entry and exit price points for your trades. This means deciding in advance at what price you will buy a stock and at what price you will sell it. 

To determine specific price points, you can use various tools and techniques, like technical analysis and/or fundamental analysis.

Technical Analysis

Technical analysis involves looking at past prices and trading activity of a stock to predict its future movements. By examining price charts and patterns, you can identify trends that suggest optimal times to buy or sell.  

You can find useful tools and resources for technical analysis on Sharekhan. Such analysis is based on the idea that history tends to repeat itself in the stock market. 

Fundamental Analysis

Fundamental analysis focuses on evaluating a company's financial health and performance. Such evaluation determines the stock's value. As part of fundamental analysis, you can take a look at the company’s financial statements and earnings reports. Here, you can observe the company's historical financial performance. For example, some of the parameters to look at can be the consistency of profits over the years or whether sales figures are increasing, etc.

While studying about the company, you can also take a look at the overall economic factors. For instance, whether the sector that the company belongs to is doing well or if there are any government initiatives announced to boost the sector, etc. This information can help you decide on whether to buy or sell a stock, depending on how the company and its business has been performing.

Adopt Risk Management

Risk management is essential for protecting your money and ensuring your investments grow over time. Just as you wouldn't drive a car without a seatbelt, you shouldn't trade in equity without having a risk management strategy. 

One of the most widely used risk management tools is a stop-loss order, which is like setting a safety limit on your investment or trade. 

For example, suppose you bought shares of Reliance Industries at ₹2,500 each. You can set a stop-loss order at ₹2,300. This means if the share price drops to ₹2,300, your shares will automatically be sold, preventing further losses. It's a practical way to ensure that you can limit your losses. 

This strategy can help in volatile markets where prices can move unexpectedly.

Stay Updated With Market News

It is important to stay updated with the latest market news and trends. You can follow financial news websites, subscribe to market analysis reports, or simply read news related to companies you plan to invest in.

Expert tip - Watch out for quarterly earnings reports to get insights into a company’s performance. This can go a long way in enhancing your trading decisions.

Diversify Your Portfolio

Diversification is a key strategy in equity trading, especially in volatile markets. Diversification means spreading your money across different stocks. 

Suppose you buy shares belonging to companies from different sectors, like technology, banking, and pharmaceuticals. For instance, you bought shares of Infosys (a leading IT company), HDFC (a major financial institution), and Dr Reddy's Laboratories (a top pharmaceutical company). 

Now, if there is volatility seen in the stocks of technology companies due to an announcement by the government, any negative impact on Infosys stocks can be balanced by gains from other stocks that you have in your portfolio. In this case, HDFC and Dr Reddy's. 

With diversification, you reduce the impact of poor performance from any single stock and enhance your chances of steady returns.

Remember, all of these expert strategies can only reap benefits if you stay disciplined and committed to your plan.