InvestorQ : How should I as a trader deal with the volatility in the market? Quite often my profit targets get hit after the stop loss is triggered.
swati Bakhda made post

How should I as a trader deal with the volatility in the market? Quite often my profit targets get hit after the stop loss is triggered.

Dia Deshpande answered.
2 years ago

Volatility or fluctuations in stock price are part and parcel of the stock market game. You cannot avoid volatility in stock markets but you can definitely manage it; and manage it smartly. Here is how!

· Volatility is an opportunity to accumulate quality stocks at attractive prices. Imagine getting HDFC Bank 25% lower just because all private banks are getting battered. We have seen that happen in the case of Bajaj Finance a little over a year ago. If you look back at the Nifty, the last 50% correction happened in 2008 post the Lehman crisis. Since then, the market has given 20% volatility on the downside on more than 10 occasions. Remember, 20% volatility is bad enough but it also creates opportunities. As a smart trader, you must use such opportunities to add more quality stocks to your portfolio. That is being proactive.

· For a trader, it is about discipline and for an investor it is about conviction. Build your portfolio on conviction and don’t let the conviction falter. If you are nervous when the market goes down, the risk level of your portfolio may not be an appropriate fit for you. Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you. A 20% correction does not mean that your stock is suddenly worthless. In fact, stocks like Infosys which have created big wealth have seen serious bouts of volatility. At the peak of the technology crash, Infosys lost close to 90% from the peak. But it recovered these losses and a lot more over the years.

· In the volatile market, you must know what to do and also what not to do. It is one thing to know what to do in volatile markets. You must also know what not to do in the midst of volatile markets. For example, one thing to avoid is trying to time the market. Many traders are obsessed with catching the tops for selling and bottoms for buying. There are two problems. Firstly, it is impossible to consistently catch tops and bottoms, even for the most seasoned traders. Secondly, even if you miss 3 or 4 of the best days, your return will only be as good as a passive strategy. This has also been proven empirically. So, don’t waste time on timing the market. Instead, remember that the Sensex has grown from 100 in 1981 to 42,000 in 2019, an annual CAGR of 16.3%. that is a big story for you.

· You have heard of SIPs in mutual funds. Apply that principle when you trade in equities too. That is because nothing beats volatility better than a systematic and phased approach to investing in stocks. Systematic investing takes different forms. When buying equities, you can use a P/E cut off to increase or decrease your allocation. Alternatively you can just create a passive systematic investment plan. The idea is that when markets are buoyant you get more value and when markets are down you get more shares. Volatility works in your favour.

· Finally, remember that your financial plan has in-built mechanisms to handle volatility. Your investment starts with a financial plan which lays out your long term goals with a plan to achieve them. Asset allocation is an important aspect of financial planning where the break-up of equity, debt, liquids and gold is worked out. When you stick to this asset allocation plan, then any profits are automatically monetized and down markets are automatically bought into. For example, if equities have rallied and their share in your portfolio has gone up too much, you need to unwind. That maintains the balance and also neutralizes volatility in the market.