Trading rules worth following while betting on the Budget

Speculating about the Budget is always about fishing in troubled waters. Nobody outside a small charmed circle has solid information. So, most traders are betting on hope and rumours. Given the chances of high volatility and big trends, it is always tempting. A leveraged derivatives trader can make or lose more money during the fortnight sandwiching the Budget than the other 50 weeks.

If you are gambling on the Budget, some rules are worth following. You must be prepared for large doses of volatility and sudden changes in sentiment. It could be a rewarding experience but you may also lose a lot of money very quickly.

Here are some rules that could help you trade with a greater degree of safety during this period.

First of all, stick to stocks within the derivative (F&O) list. It is your business whether you trade them on the stock futures segment or in the equity segment. But don't move outside this charmed circle of F&O listed stocks. Ideally, the stocks you track should be cut to the market leader in each key sector.

Budgets set up broad trends that affect entire sectors. If you diagnose a trend correctly, any stock within that sector will give good returns.

If you are wrong, you want to exit with least damage. A small stock may suffer sudden loss of liquidity, which makes it difficult to exit losing positions.

A stock listed in the F&O segment is guaranteed basic levels of liquidity, which makes exit easier.

Be prepared to go short if you suspect the Budget will have a bearish impact. Most retail traders are much more comfortable on the long side. However, the chances of a post-Budget downtrend is somewhat higher than 50 per cent if one goes by history. Being short implies using the stock futures segment. Make sure you understand the exact implications of margined stock futures positions.

Keep strict but wide stop losses. Due to the chances of abnormal volatility, you may need to set a wider stop loss than at other periods. But that stop loss should be strictly adhered to. If a stop loss is hit, exit without exceptions. If your position runs into profits, move the initial stop loss up (for a long position) or down (for a short).

Don't average up or down in losing positions. Pyramiding when you have a profitable position is reasonable: you are in profit and apparently, have diagnosed a trend correctly.

The temptation to pyramid a losing position can be great. But it's best avoided, especially during Budget periods when you may be unaware of some vital information available only to “insiders”.

The rules suggested above won't guarantee making money. But they will reduce the chances of ruinous losses if you decide to play the Budget game.

The author is a technical and equity analyst