How to Trade the News Driven Market
There is a phase comes in the market when it is driven by News. It comes once in a few years. In such situations, the market reacts on news. Since the Covid19 outbreaks, the market is gyrating on the drum beats of News. The hope of getting the Vaccine for Covid19, giving the positive sentiment however, it looks ephemeral as the market turns in an unusual direction when the hope disappears. Thus the market is suffering from the longevity of the trends. That’s the reason, it gets one day up the other day is down. This is a pure news-driven market.
If you want to de the news-driven market, you can look for the following traits in it:
High Volatility
I always talk about the Volatility. It is a very good instrument that helps you to assess the market sentiment. Basically, Higher volatility indicates the uncertainty in the market and we also face the uncertainty in news-driven market. Positive news takes up, and negative brings down.
There is a Volatility Index for our market named India VIX. You can check its level for the check the level of uncertainty in the market. Generally, VIX ranges in 10 to 20 and never sustains the extreme. However, we have seen it has touched 82 a few days back in March 2020 and it continuously sustains around 40. It is an outlier data.
If VIX sustains anywhere beyond its range (10 to 20) brings uncertainty in the market and then the market starts reacting on News.
Low Open Interest and Volume
The open interest suggests the participation and liquidity in the market and the same goes for the Volume. What if the liquidity reduces by a significant margin? This also suggests the uncertainty. Though, we perceive wild moves in the market but participation gets a hit.
If you compare the historical Open Interest with the current OI, you will definitely get surprised by the liquidity. Here I am sharing three Open Interest image of three different dates. You just compare them. All OI is taken on Tuesday.
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| All the OI is in lakh. Credit Image Telegram Bot: OIinAction_bot |
In the first and second image, the average OI is much higher than that of in the third image.
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| OI position when VIX was around all-time High around 80 |
Inconsistent Direction
The trend in the news-driven market is inconsistent and short-lived. None of the development last long. Either positive or negative news gets a discount fast so does the reaction of the market.
Inconsistency in trends also brings some choppy market as well as a sharp move for a short period.
We have witnessed such consistency in 2008 during the financial crisis and the similar situation we are getting during the Covid19.
Gap up and Gap Down Opening
The market witnessed, huge gap and gap down during the uncertain market. In such a situation, the most of the trading opportunity is eaten by it. However, those gap ups and gap down give you an indication of the uncertainty and news-directed market.
Trading in such a news-driven market becomes tough as one need to keep a big stop loss and probability is still there to hit. Thus, in such time you need a different approach for trading.
Don’t Have a Bias
Generally, when you go for trading you have a bias for the market. However, I would suggest to have not a bias in the news-driven market, just go with the flow. Do what the market does and leave everything else on the market.
Trade with Less Volume
In the above discussion, we saw market reduce its volume by half or one-fourth when an uncertainty hits in the market. You also do the same by reducing your trade volume by half or maybe according to your risk craving. Trading with less volume can help you to protect your capital.
Don’t Carry Position overnight
There is always a risk to carry the position overnight but that risk is multiplied when the market reacts on news. Say, everything looked picture perfect today so you carried your position for next day and what happened if a negative hit the market in the night, the scenario can be changed that time.
Especially, Monday hunts a lot (if you carried position on Friday) during such market as there a huge time in the weekend to develop news that reflects on Monday in the market. Historically, we have seen huge uncertainty on Monday, you can also check here.
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