Is trading more profitable during volatile periods?

A lot of macroeconomic factors have been going on recently. There has been an ongoing war in Ukraine. Then there was a Gaza conflict. And recently, there has been the US-Iran and Israel war. When such negative macroeconomic factors are present, markets also behave very differently. New development can happen anytime. And the market is always expecting new developments and trading based on that.

Often, technical analysis does not seem to work during wartime. Moreover, there is a high chance of overnight gaps up and down, which can lead to either massive profits or humongous losses. The volatility levels also rise substantially. Trends also start to appear suddenly and reverse without any warning.

Because volatility is high, premiums start to increase and experience large swings in the market. This can bring more opportunities for the traders, but the risk also increases. Hence, it is very important to understand how to trade during wartime.

What Changes During War or Global Uncertainty

Trading changes during war and periods of global uncertainty. Some of the things that change, especially in fundamentals, are as follows:

There is an increase in volatility and IV.
There are frequent gap ups and gap downs.
Even during intraday reversals become very normal. Nifty can move up and down very easily in a single day.
Since correlations among global markets are high, movements in other markets, such as the US, can significantly affect Indian markets.
Markets tend to have quick breakouts and breakdowns because institutional participants adjust their risk exposure quickly as new information flows in.

Implied Volatility Expands Quickly

One of the most important changes is that the IV increases substantially. Now this a lot of things for both option buyers and option sellers. For option buyers, the prices of both call and put options increase, so they have to pay a higher premium to take the position. For option writers, the risk of ruin increases because the market can reverse at any time, and a profitable position can become loss-making extremely quickly. It becomes important to understand that a higher IV does not automatically mean a better opportunity. It often means higher uncertainty.

Direction Becomes Harder to Predict

During stable markets, prices often respect technical analysis. Trends are easier to protect with different ideas, such as moving average crossovers or doubt theory. Moreover, during crashes, market trends tend to remain in place for long periods of time. However, during uncertain environments, the market may break important zones and expectedly. For example, if the trend is up but suddenly there is negative news, the market can gap down and break support very easily. On the other hand, the recovery can be strong if positive news has emerged. This makes it difficult to hold strong directional views. Option traders who rely solely on directional conviction may experience inconsistent outcomes.

Things to keep in mind while trading during uncertain times

Avoid Oversized Positions

Here are a few things the trader should keep in mind when trading at different times-

The trader should not hold oversized positions. Traders should try to minimise their leverage exposure so that a single trade does not wipe out large profits. Traders should focus on risk management and correct position sizing before taking any trade. One good idea is to use the Pyramid technique and do stop-loss training to safeguard profits. Preserving capital becomes more important than maximising return per trade.

The next thing that a trader should keep in mind is to trade rest-defined strategies. Rather than going for naked long or naked short strategies, the trader should go for spreads or iron condors. The best part about risk-defined strategies is that the worst-case scenario is manageable. Also, during high IV periods, traders can go for calendar spreads, which can offer good profitability opportunities.

The next thing the trader should minimise is taking naked overnight positions. Global news can break at any time, especially after market hours. So if the trader has taken an unhest overnight position and their big gap against the position, the results can be catastrophic.

Common Mistakes in News-Driven Markets

Here are some common mistakes traders should avoid when trading during wartime.

The traders should not take excessive leverage. Though it is lucrative because the market is growing quickly and there is a temptation to use high leverage to increase profits, it also means a trader is taking a higher risk.
Traders should also avoid taking naked positions overnight. Hedging is a must and can be done by trading spreads.
Another problem is that traders might take too many frequent trades. During high IV the slippage increases, and hence if too many trades are taken, the trader might lose a lot of money due to high slippage.
Finally, the traders should not react emotionally to headlines. They should be reactive but wait for the market to cool down before taking irrational trades

Summary

Trading strategies can vary significantly during wars and periods of global uncertainty. Increases and the markets become extremely unpredictable. The risk increases substantially, and hence, traders need to adapt their structure, expectations, and position sizing to changing markets. Consistency in uncertain markets comes from respecting uncertainty itself. Not from attempting to eliminate it.

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