The golden rule says, "Buy when the streets are in blood" in reference to the falling market. Considering the current situation in the world, we should say, "Buy when COVID-19 is on its way". But do you actually have enough courage to earn during the crisis? Can you leave popular clichés and superstitions behind to make substantial wealth?
While experts say that to catch a falling trend is harder than to seize a bullet with your teeth, specific traders find the way to take advantage of the crisis and make a good profit when investing in stocks, bonds, and other trading instruments. We have conducted an ultimate guide on how to trade in a fallen market and join the community of Forex jet sets.
Would you like to become another Warren Buffet or John Paulson? Then don't stop reading.
Are Traders Affected by the Crisis?
They certainly are but in a different way. The financial theory says a trader needs to behave rationally to maximize revenue and utility. However, a few people actually follow that concept. It is all about the fear that makes them behave irrationally. When the crisis is on, the majority of traders are mainly driven by their emotions, especially when the global economy faces uncontrolled chaos.
This is what we seem to have right now with the development of corona. The field of behavioral finance defines reasons for people to act differently from what is said in financial theory. They may include:
- Mental Accounting – the concept suggests allocating or saving money for future purposes when the situation goes out of hand.
- Emotional Gap – it is the process of decision-making that is mainly driven by emotions as a result of extreme conditions. What would you do when you feel angry, anxious, or excited? Those are hardly the best emotions to make a rational choice or analyze the market.
- Anchoring – the behavioral model that makes people rationalize their spending. They start to invest less, even when the profit is obvious.
- Self-Attribution – a concept when people stick to the niche they are mainly specialized in. Some traders start ranking their competence higher than others do.
All the above-mentioned prevent traders from making decent revenues. A few understand that a crisis can be the right time to make significant profits. All you need is a trusted broker and a bunch of trading instruments to choose from.
Another reason for missing your chance to bear fruit on trading is the fact that you are probably more loss-averse when you actually need to be risk-averse. What? Never heard of those terms? Let's find out what they mean.
Are You Risk-Averse?
The term refers to traders who would rather preserve their capital instead of looking for a higher-than-the-average return. Risk trading always goes hand-in-hand with price volatility. It can make you rich right at once.
On the other hand, minimized risk comes with stability, while low-risk trading ensures return. The only problem is that return will be close to zero with no chances to make substantial wealth.
Dividend growth stocks are the best example of risk-averse traders and investors. All they need is to get predictable dividends within a given period. A hassle-free process to offset potential losses but not more.
The crisis affects not only investors but also companies who establish commissions on a deposit. So, do not be surprised when the dividends you get will be cut down drastically due to the crisis and worsening geopolitical situation.
Note: emotions and fears will doom traders to failure. The key problem here is that they are scared even when the market has recovered from the downfall. The latest reviews show that 93% of Gen Z representatives have distrusted the Forex market during the current corona crisis. How many of them will come back?
Of course, you may say, "And how about defensive sectors!". We would say that finding a company that is not affected by the crisis or the economic downturn is a tough challenge. In other words, you will always need to think of a Plan B to reinvest your capital, which can also be pretty risky.
It's always a good idea to first try yourself in a risk-free environment.