How To Effectively Trade In Different Markets

Strategies and Techniques for Effective Trading in Different Markets

The common belief in the market is that the only way to make profits in the stock market is in a bull market. That is not always the case. For instance, many mid-cap and small-cap companies have done very well when markets have gone nowhere. Also, bull markets as a ratio of overall market conditions are still quite limited. In the last 20 years, there have been various cycles in the stock market, like bullish markets, bearish markets, sideways markets, volatile markets etc. These cycles are very hard to predict. To profit from market cycles, you must understand the structure of the cycle and then decide on the strategy.

Trading during a secular bull market

Bull markets can either be brief or they can be prolonged. For instance, the bull markets of 1992 or 1999 only lasted for a few months. However, the bull market of 2003 lasted for a full 5 years. Secondly, the theme in each bull market changes. The 1992 rally was about cement, the 1999 rally was about software / Telecom and the 2007 rally was about realty and infrastructure. The simplest way to profit in a secular upcycle is to stick to these market drivers. However, the risk is that if you left holding for too long, you can also see value destruction. This happened to IT in 2001 and to real estate in 2008. The best method in a secular bull market is to use intermittent dips to buy into the driving sectors.

How to trade in a structural downcycle

Buying in a bull market is always much easier than selling in a down market. that is because trading in a structural downcycle requires a lot of counter-intuitive thinking and a lot of guts. The best way to be profitable in a downturn is to exit the sectors or themes that triggered the rally in the first place. Normally, no two rallies are led by the same theme, so you can expect the driver of the previous rally to correct for a long time. The best way to play this trend is to sell on the rise as long as negative sentiments exist in the market. This is where the more savvy traders can use futures. In fact, one of the best ways to play a structural downtrend is to sell call options on every rise since buying puts can be quite expensive. The sell-call strategy works very well in a falling market

How to trade when the markets are just volatile

Is there a way to trade volatility, when the direction is not clear? In fact, there are several ways. One obvious way is to shift your buying from the small caps and mid-caps to the large caps. The other way is to shift out of speculative stocks and stick to large-cap names. The second way to trade a volatile market is to focus on options strategies like long straddles and long strangles. Here you can make profits from wide movement, irrespective of whether it is on the upside or the downside. Lastly, it is possible to trade the VIX (volatility index) on the NSE. You just need to go long on VIX when you expect volatility to increase and vice versa. Here a bit of F&O savvy will surely help you.

How to meaningfully trade in a lacklustre market?

This is approximately the reverse of the volatile market. You can adopt an equity strategy or an F&O strategy in this case. This is not the time to be adventurous. For example, high beta stocks will not work and it is the defensive sectors like FMCG and IT that are likely to show more traction. For the more F&O savvy traders, you can look at reverse strangles and reverse straddles to make the best of lacklustre and rangebound markets. 
The bottom line is that there is a strategy you can adopt for each type of market. the idea is to have a game plan for each cycle and gauge the structure properly. It is not too complex!