Volatility is the Trademark on the D-Day!
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In any country, the election period is keenly viewed by everyone alike as it has major ramifications on the economic growth of the country finding its linkages to inflation-growth equilibrium, new government policy framework, foreign affairs amongst many other things. There are speculation and discussion by think tanks and research firms on which the government may come to power and these speculations led information gets interwoven with the functionality fabric of the market. It is only on the election results day speculation comes to its reality check.
The Nature of the Event
The stock market historically is seen turning volatile during the run up of the election results day and provides multiple opportunities for entry and successful trade exit.
However, a mix of emotions – ambiguity, excitement etc. come into play for the traders, which sometimes eludes them from making effective trade calls.
So, upon looking at the nature of the market, you realize that it compresses the future into the present. It means that market discounts all future possibilities in the current scenario. To that matter, depth of future like short term, medium term and long term have different kinds of bearing in the market. Short term is more oriented to sentimental changes, Medium term is more prone to cyclical and industrial changes, and the Long term is more inclined to changes in culture.
Is it Long Lasting?
Election results as an event have short term implication on the market. Because the stock market in the long run heavily depends on economies, not on politics. Looking at the short term nature of the event, it is mainly driven by sentiments. This is an event which happens once in five years’ time where the citizens of the country vote to decide new government for next term. So, the event is heavily charged by sentiments.
We have already seen the partial burst of sentiment when Exit polls came out with their number. So, on the D day, we see a repetition of that episode with more intense volatility.
A Trader’s Point of View
Looking at Election results day from a trading perspective, it is an extremely volatile session. And in extreme volatility, it’s not trading set up but risk management needs to be a front seat. To identify potential sector and stocks, one needs to understand the manifesto of political parties where they mention their priorities and inclination. In general, political parties have a focus on rural schemes, Agriculture and allied activities, Infrastructure and social welfare agenda.
Looking at personalities of traders, Old and Bold traders participate in such a volatile session. They focus more on their quick adaptability to changing the situation of the market as the market is likely to see whether, of all seasons in one day, that is extremely high to low and extreme low to high. A second most important element is risk management, they know in advance for their position sizing, risk on per trade and an approximate number of trades to take. Last but not the least, selection of sectors and stocks to operate within. Before trading session starts, they do some mental rehearsal for their trade set up and risk management.
From the angle of Investors, they generally try to find deeply discounted price when the market declines and figure out strong breakouts in strong fundamental companies. Looking at historical election events, the market has shown a rising tendency from a medium-term perspective in the post-election arena. So, any short term decline in the market can be used for accumulation and building a portfolio.
Refocusing on the immediate implication of event, It’s not just one-day impact. We will see volatility in the short term as there will be some events like policy announcement, portfolio allocation and formation of a cabinet ministry.
So in this short term journey, we need to tighten our belts.