Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

What Causes Long Term Market Volatility? Anticipation or Participation?

2 min read

Market Investors always posses market expectations/anticipations. Not every time the market expectations are turning out to be the realized in any given month. But there are times the market expectations combined with market participation does develop accelerating long term maniac trends.

Deeper Economic Crisis

The bad news is something that is not new to the markets. Terrible pieces of economic information hit the newswire on a frequent basis. But a monstrous economic crisis combined with accelerating long term sellers brings long term volatility.

Economic Crisis is the key trigger for Long term volatility. Let it be the 2007-09 – Subprime crisis or the ongoing 2019-20 – Covid-19 economic crisis, it has a macro impact on the market returns. As the Markets & Economy are interconnected globally, any deeper impact on the economy, bigger its influence on the overall global market’s performance.

TickerDate/TimeCloseClose to CloseHigh to LowATR(5)Returns %
Nifty FutureJan-2011994.3-251.95446.2598.45-2.06
Nifty FutureFeb-2011149.15-845.151143.75707.51-7.05
Nifty FutureMar-208620.95-2528.238921344.41-22.68
Nifty FutureApr-209842.41221.451832.951442.1114.17
Nifty FutureMay-20 (till to date)9066.2-776.2745.951359.96-7.89
Data as on 21st Mar 2020

However, when the expectations gets materialized during the economic crisis it accelerates the market volatility. March 2020 is a classical example for accelerating volatility as the fears in the market gone to the extreme due to 66,000 crore of FPI selling.

Most of the time the market expectations are far away from what is getting realized in the market. It is primarily due to the intensity of the long term traders’ participation. Long term investors’ participation fluctuates and so the intensity of their participation too fluctuates.

During the month of Apr and May 2020 the intensity of selling declined however market expectations among the majority of the traders/investors remain elevated though the economic crisis getting penetrated globally deeper and deeper.

India VIX is yet another measure of volatility created by accelerating investor selling. India VIX during March 2020 reached 80+ alarming levels and the degree of uncertainty is at the peak, followed by a cooling-off period during Apr and May 2020 with a rapid decline in volatility.

Rapid Decline in the volatility is an indication that Investors are getting prepared for the Economic crisis and further anticipated bad news. This acts as a shock observer when investors are getting used to the market mayhem.

Greed Driven Maniac Markets

Greed Driven markets are double side sword. It brings long term volatility on both the sides. Classical example is 2017-18 Bitcoin Bubble where bitcoin reached 20,000 USD with a great acceleration in the price due to larger participation from the new set of investing crowd who never/little tasted the feeling of Investing. Always newbie investors have unrealistic market expectations on returns with higher hopes.

Bubbles are the result of piling long term newbie investors who believe in the projected economic story. Always such bubbles are cashed out by the intelligent investing community.

Thus most of the financial market bubbles are driven by long term volatility melting the prices up driven by long term newbie investors and cashed out by informed investors community before the nerves of newbie investors start cooling down which again results in accelerated volatility and this v-shaped market returns with volatility on both the sides.

Fear Driven Markets – Opportunistic Play

Though Covid-19 brings a deeper economic crisis. It also brought investing opportunities in selective counters like Reliance where a long term investor selling is completely absorbed by new investors seeing it as a sudden value buying opportunity which again brings accelerated volatility on both sides with a v shape reversal.

It is evident from most of the cases that it is not the market expectation that brings market volatility but the combination of market expectation with wider market participation brings a higher degree of volatility.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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