Last Updated on Oct 26, 2021 by Aradhana Gotur
This article is written by Harsh Vora Harsh Vora, a proprietary investor and day trader with more than 10 yrs of experience in financial markets. He is interviewed on ET NOW and his columns are published in reputed national financial newspapers like Live Mint.
As you may have gathered, Muhurat Trading is a special one-hour trading session that is held during an auspicious time slot on Diwali. This year, the special session will be held on 4th November between 6.15 pm to 7.15 pm.
While the fundamentals of short-term trading as well as long-term investing during Muhurat Trading remain the same as during the rest of the year, this one-hour session holds historical significance. It first started way back in 1957 in the Bombay Stock Exchange to commemorate the start of a new Hindu calendar year and has been held every year since. To welcome the new year, investors normally only buy a few quantities of stocks as a token. Why only a few quantities?
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Mind the trade volumes
For one, the trading volumes during this hour are weak. This is because, in a very limited period of one hour, the traders may not get time to close the positions that they may take at the beginning of the session. Given this, they avoid opening a position in the first place. Also since Diwali is a holiday the market participants are not as active as during regular days.Trading volumes during this Muhurta Trading session are weak because traders/investors may not get enough time to close positions that they open in a very limited period of one hour. Click To Tweet
Two, since this is considered an auspicious hour, both traders and investors avoid selling stocks unless the market fundamentals suggest so. The relative lack of active sellers in turn implies low liquidity in the market, which dissuades market participation.Trading volumes during Muhurat Trading are weak as traders and investors avoid selling stocks unless the market fundamentals suggest so. Lack of active sellers implies low liquidity in the market, which dissuades market participation. Click To Tweet
Checklist for Muhurat Trading
So the question is, how should we approach this trading session and what checklist should guide our decisions?
1. Stick to fundamentals
For long-term investors, the most important thing to remember is to stick to the fundamentals of investing. During Muhurat Trading, it is tempting to fall prey to emotional exuberance and purchase stocks based on random tips. All said and done, over the longer term the stock prices respond to earnings growth. If the earnings growth of a company is low, for instance, then it may not help to invest in the company.
Similarly, other metrics to track to gauge a company’s fundamentals are return on capital employed (ROCE), debt to equity ratio, price-to-earnings ratio, and more.
2. Consider investing, not trading
The point is, it’d be wise to use the auspicious hour of Diwali to initiate your long-term positions, either in stocks or mutual funds, after assessing their fundamentals.
Secondly, remember that a one-hour trading period is not conducive to intraday trading, especially given low volumes and liquidity. For swing trading (which means holding positions for more than a day), only trade when the setup is right and the market provides attractive opportunities. If it does not, then you may well use this hour to screen fundamentally strong stocks using Tickertape’s Screener, and researching the ones you may find promising.
Remember, executing trades is only 1% of the work. The other 99% involves screening stocks, researching them thoroughly, or backtesting your strategies. Any research or back-testing you’d conduct during this auspicious hour may turn out to be equally rewarding.