Union Budget 2019: Why New Investors Should Avoid the Stock Market on Budget Day
Inexperienced traders should keep away from the stock market as the volatility will be high, margins will be blocked and the risk to reward ratio will in all likelihood be favourable.
Representative image (Reuters)
If you are a stock market investor, you would know how keenly traders wait for the annual Union budget. The weeks leading up to the budget reveals are characterised by analysis, expectation and prediction reports in an attempt to lure you to bet your money on the markets on the D-day.
However, any experienced or professional trader will tell you not to trade on Budget Day if you are inexperienced. Here’s why:
Volatility will be extremely high: The benchmark stock market indices, Nifty 50 and BSE S&P Sensex, will swiftly move up and down as the budget speech progresses. It is almost impossible to predict the direction of the market as the next announcement may just reverse the ongoing trend. Since the Nifty moves so fast, it becomes difficult to time your trades. Stop losses may be hit in no time, leaving no room for traders to analyse the scope of an upward or downward movement. Hence, it is better to wait for budget day to get a complete sense of what happened and trade on days when the markets will be less volatile.
Margins will be blocked: Most brokers do not allow the normal margin rules on the budget day. Especially for intraday trades, brokers do not allow trading equity cash and hence the margin that is otherwise allowed might be blocked. So, traders who select MIS (margin intraday square-up) to trade in equity might witness rejected orders due to the margin rules. So you will need all cash in your account to trade on budget day, which will raise the vulnerability quotient of a new investor even higher. Be wise. Spend less on budget day since you are more likely to lose money.
Risk Reward Ratio will not be in favour: Consider this – an investor is risking more money to make lower profit under stressful conditions. It is not an attractive proposition. Risk reward ratio will definitely not be in your favour that day. So wait till you gain some experience and then try your hand in markets on days like these.
You will be forced to trade at prices you don’t like: After all the advice, let’s say you still want to place an order on budget day. If you select ‘market’ order, you will not get the price you were initially hoping for because of massive jumps and drops, and if you go for a ‘limit’ trade, you may not get a good trade fill fast and will have to wait longer. You may be forced to modify the order and hit the ‘market’ option just to fill your order. So basically, you are forcing yourself to trade at prices you don’t like. There’s little point in doing that.
Nothing goes as planned: There is nothing usual about trading on a budget day. It is very different from other days. Volatility is extremely high, blocked margins, unbelievable flow of news make it impossible to have a plan, and even if you have one, it would be next to impossible to follow it. So on such uncertain days, just watch and learn. Protect your capital, since this is your responsibility as an investor.
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