Traders prefer strong trends, but the markets may not always be so kind. What should you do then, if the markets are rising and falling without giving you much time to react? How to reduce trading loss?
If these questions have often crossed your mind, read on as we discuss a few strategies to deal with volatile markets and share some ideas to help minimise trading losses.
Tips to minimise trading losses
It involves acknowledging that markets know more than an individual trader and prices reflect a more accurate picture than one’s conviction. Hence if you are a momentum trader, it’s crucial for you to follow a strict stop-loss instead of strongly sticking to an opinion about a stock or an index.
You could place a stop-loss slightly below or above the key trading levels on the trend-line depending on your position (long or short). Another option is to use moving averages to determine your stop-loss levels.
Also remember to set a realistic price target. Instead of being too strict with the price levels, be flexible to alter them depending on the changing market conditions. In short, you may alter your targets and stop-loss parameters as you get the hang of things but never forget to set a stop-loss.
2. Using margins smartly
When markets are volatile, not using up your entire available margin in one stroke is crucial. However, if you have a large open position which can expose you to directional risk, you may use margins to simultaneously build short positions which may act as a hedge.
3. Avoiding greed and fear
The fear of missing out can be as troubling as the fear of being stuck. Sometimes the most intelligent strategy is to sit out for a while and let the dust settle. Preserving cash is important when the markets are extremely choppy and directionless. You may tactically deploy this cash to build fresh positions when markets depict a clearer trend.
4. Multi-leg option strategies
If you are an active F&O trader, you might resonate with this almost instantaneously. Sometimes we sense a big move but are perhaps unsure of its direction. We take our chances. Follow our gut feeling. Initiate a position in the market—only to realise later that it was a losing trade. While on other occasions when the markets trade in a tight range, taking the "right" call may seem equally difficult.
When markets are either expected to be highly volatile or likely to remain in a tight-range, you may follow multi-leg strategies such as straddle and strangle. Here's a table to help you better under stand them.
Now let’s consider another scenario. The prevailing price of Reliance is Rs 2,420 and its 25-May-2023 call option with a strike price of Rs 2,460 commands a premium of Rs 29.4 and put option with a strike price of Rs 2,380 trades at Rs 23.45. Since short strangle involves writing out-of-the-money call and put options, the trader will make a profit only if the prices remain in the range indicated in table 2.
On the contrary, since long strangle involves buying out-of-the-money put and call options, the payoff will begin once the price of the underlying asset (Reliance) breaches the breakeven range.
Similarly, you can evaluate the trade-offs of long and short straddles.
Non-trending markets are often frustrating. Too much or too little volatility may hinder potential trading outcomes thereby resulting in trading losses. At such times, following intelligent options strategies and maintaining a disciplined approach may just hold the key to success.
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