How to trade when markets go wild: Shubham Agarwal

In markets like these, how do you trade? That's the real question. Directional bets feel risky. Sitting out feels worse.

• Nifty fell from lifetime highs to 25,200 amid war news and FII outflows
• Pair trading helps neutralize sector-wide risks in volatile markets
• Lower profit with pair trading offers better risk control during uncertainty

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January 2026 has been a wild ride. In the first week, Nifty flirted with lifetime highs. Traders were bullish. Budget plays were roaring. Talk of 27,000, even 29,000 levels filled the air.

Then everything changed. War news, uncertainty over tariff deals, depreciating currency, FII outflows. Nifty tumbled hard. Now we're near expiry, hovering around 25,200. Sentiment has flipped to being pessimistic.

In markets like these, how do you trade? That's the real question. Directional bets feel risky. Sitting out feels worse.

Picture this. You like a stock based on budget expectations and derivatives data. However, global news has the market under pressure. Your stock will eventually feel that pressure too. Or consider another scenario. Pre-budget, stocks give fake breakouts. They rise but don't follow through. Directional trading becomes difficult.

Most traders respond by reducing lot size. But there's a better way. Pair trading.

What is Pair Trading?

Pair trading is simple. Buy one stock future. Sell another stock future. Two positions, one strategy.

Why Trade in Pairs?

Stocks face two kinds of risk.

1.      Systematic risk: that hits the entire sector or market. A policy shift, rate change or global events

2.      Unsystematic risk: which belongs to individual companies. Could be poor results, operational failures etc.

Pair trading neutralizes systematic risk.

Imagine US tariffs hanging over a sector. The news could drop any day and take the whole sector down. But you like one particular stock in that sector based on derivatives data. So you create a pair. Buy your stock. Sell another stock in the same sector.

Tariff news hits? Both the stocks fall. Your loss on the buy gets offset by gain on the sell. Sector factors get neutralized. Your profit or loss now depends only on the relative performance between the two stocks.

How to Trade in Pairs?

Let's say you want to buy a manufacturing stock future. But tariff risk looms.

Find another stock from the same sector that satisfies two conditions.

First, it historically moved in tandem with your stock. Rallies and falls around the same period.

Second, it has outperformed your stock recently, say over the past month. Risen more or fallen less.

Then execute. Buy your stock. Sell the outperformer.

Manage risk actively. Set a stop loss on your long position. If it hits, exit both legs of the pair. Your loss will be smaller because the short position likely fell too.

In a situation where your stock hits target, profit may be slightly lower as the stock you sold might also rise. But that's the trade-off for reduced risk.

Many traders dismiss pair trading after comparing absolute profits. They see the lower number and get discouraged. They forget to account for risk. They miss the bigger picture. Lower profit with controlled risk beats higher profit with uncontrolled downside.

Over the years, countless traders have faced huge losses during extreme volatility. Pair trading offers a solution. During volatile markets, near market highs, or before key events like budgets, adopt pair strategies. Trade smarter, not just harder.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.