Modules for Beginners
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How you can trade on budget day
Now that we’ve covered muhurat trading, it is time we looked at another important milestone day with respect to the stock markets - the budget day. This is arguably the single most important day for stock markets and the developments and announcements made on the Union Budget presentation have a profound impact on the stock markets.
This is why many traders simply skip trading on budget day. However, while that is a good strategy, it is not always advisable to stay on the sidelines. Especially when there’s a lot of potential to make both short-term and long-term gains. And so, in this chapter, we’re going to take a look at a few things that you should account for when attempting to trade on budget day. Let’s begin.
How to trade on budget day?
As you’ve already seen above, here are a few things that you should keep in mind when trading during budget day.
- Account for increased volatility
The Union Budget, with its announcements and developments, basically sets the stage for the forthcoming financial year. And so, the stock market and the investors tend to keep a close watch. Therefore, any budget announcement, whether positive or negative, tends to drive up the volatility.
And as a result, the stock market price movements may swing wildly on either side. This is something that you would need to account for when trying to trade during budget day. If you find that the volatility is too much, it is best to refrain from making any new purchases.
- Use the day to pick up fundamentally good stocks
Usually, if the budget announcements turn out to be not favourable to investors, the stock market tends to react negatively. This negative reaction paired with increased volatility can even lead to a brief, but deep sell-offs. While all of this may seem quite scary to an average investor, you can actually use this situation to your advantage.
If there indeed is a stock market sell-off, you can use this opportunity to pick up fundamentally good stocks for low valuations. As you already know by now, the stock market always bounces back up. And so, when the market finally rises back up, you can sell your holdings for handsome profits.
- Be cautious with futures and options
Derivative contracts such as futures and options are great ways to make short-term profits. However, their risk to reward ratio is usually quite high. And during budget days, the risk to reward ratio goes even higher. Depending on the circumstances, the risk can sometimes far outweigh the rewards even.
And so, if you’re planning to trade derivative contracts on budget day, it is advisable to exercise maximum caution while doing so. The increased volatility can swing the prices of the contracts wildly, and can amplify your losses. One way to counter this is to use strict stop losses on all derivative contracts. This way, your losses, if any, will not break your bank.
- Use options strategies
Despite the increased risks, if you’re still inclined to trade in derivative contracts, it is advisable to use options strategies and spreads. These will help limit your losses due to increased volatility and unexpected price movements. That said, here’s something that you should know.
While options strategies and spreads can limit your losses, many of them also tend to limit the amount of profits that you can make. So, that is something that you would need to account for when using these trading tactics. If you need more information on the kind of options strategies and spreads, check out the other modules of Smart Money.
- Stick with limit orders
This is another major tip that will help you tremendously when trading during budget day. Since the likelihood of wild price swings tend to be much higher on the day, placing market orders can be quite detrimental. By the time a market order is placed and executed, the price might have either increased or decreased significantly due to increased volatility. This can end up causing severe losses.
However, you can mitigate this risk by placing limit orders instead. Since these orders get executed only at the price range that you’ve chosen, you don’t run the risk of getting stuck with a price that you don’t want. Although, with limit orders, there’s always the risk of your order not getting executed, it is far better than having to take a loss due to wild swings in price.
Union Budget presentations are almost always eventful, which can lead to strong market reactions. And so, it is important to stay prepared for any eventuality. By diligently following the above mentioned tips, you can protect yourself from losses and earn a chance to make profits.
A quick recap
- Account for increased volatility on budget day.
- If there is a stock market sell-off, you can use this opportunity to pick up fundamentally good stocks for low valuations.
- If you’re planning to trade derivative contracts on budget day, it is best to exercise caution while doing so because of the increased volatility.
- Despite the increased risks, if you’re still inclined to trade in derivative contracts, it is advisable to use options strategies and spreads.