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.
MTrading offers a free demo account with $5000, where you can test anything under real-market conditions. When you feel confident enough, you can always proceed to live account then.
Are You Loss-Averse?
What is more important to you: PREVENT LOSING $1,000 or MAKE $1,000? If you are from the first group, then you may consider yourself a risk-averse trader. The idea is pretty simple. Fear works as the strongest motivator, especially under the falling market conditions. How to earn money during the crisis when you have your back against the wall and very scared?
First of all, you should not sell all of your stocks at the first sign of potential trouble. Secondly, you are not supposed to trample over other instruments in an effort to prevent losses. We are witnessing a basic and primeval instinct a few traders can overcome.
Like most of the emotional traders do, you would probably like to prevent the pain of a loss. However, it rarely means rational decision-making. When people panic, they run amok and witness severe trading crashes.
A good idea is to move your capital to safer trading instruments. They may include currency pairs or cash equivalent instruments like gold.
Trading in a Fallen Market and Taking Advantage of a Crisis
Now, when we have overcome your fears, you are ready for trading on the falling market. This time we will review some handy tips on how to make money during the crisis. But first, let's have a look at how to benefit from the situation in reference to Forex.
You get a chance to buy assets directly from those restless investors driven by the fear of losing everything. As we have stated earlier, fear is the most powerful engine that influences the market. As a result, rational traders have a perfect opportunity to buy assets off BELOW INTRINSIC VALUES.
The key concept: while the majority of traders are trembling with fear in panicking, coldblooded pros can witness the price going down. This is what we call "the best buying opportunity". You will hardly have a better situation to buy commodities and stock at the lowest initial price on the market.
Here are three baseline elements of success for such a strategy:
- Discipline to take rational decisions.
- Patience to wait the price going down.
- Funds to trade liquid assets
When the crisis breaks out, the market turns into ashes. Trading instruments are punished accordingly. All you need is to wait a bit. Once the dust has been cleared, prices immediately bounce back where they were before the downfall.
Experts have thoroughly examined the effect form the 28 most powerful global crises in modern history. They include WWII, the 9/11 terrorist attack, The Great Depression, and many others. Market prices ALWAYS make their way back to initial value even after severe falling. Those who hurried up to sell assets with fear, faced the need to buy their portfolios back at higher prices!
Forex Market Crisis Example
Let's have a closer look at the situation on the Forex market after the attack on Pearl Harbor by the Japanese. The S&P 500 index made a huge gap right at once falling down more than 4%. The fear made most investors sell their assets, especially after another 14% drop. But in 1945, the index managed to return more than 25%, which exceeds points it lost during the crisis.
Tips on Trading on a Falling Market
From theory to practice. Now, it is high time for you to benefit from real-life tips on how to earn money during the crisis.
- Define Good Stock to Buy. While both good and bad company stocks tend to go down during the crisis, only good stocks will be able to recover. So, stick to stable companies' shares.
- Consider Dividends. Yes, we have said about low dividends that can be close to zero, especially when the market is shaking. At least, it is better than nothing.
- Use Diversification. Do not stick to a single sector. Try to rotate trading instruments. A good idea is to opt for ETFs. Keep an eye on how each sector performs during the falling market.
- Use Margin. It can be a powerful tool when used wisely. Traders underestimate it also comes with a certain risk.
- Be patient. Once again, keep it calm and do not panic with the rest of the traders. Wait a bit, grab your chance, buy assets, and observe the market recovery along with your wealth growth.
See real-life examples of how those tips helped to earn billions of dollars.
World's Top 3 Traders Who Made Money in the Falling Market
Still have doubts about whether to enter the Forex market when the situation seems hopeless? Check out the story of the world's top 3 traders who managed to take advantage of the global crisis and make wealth.
1. Warren Buffet
Buffet found some good stocks to buy during the crisis back in 2008. He purchased shares on $5 billion getting 10% interest rates in addition to extra warranties. He did the same with several reputable companies that included General Electrics, Goldman Sachs, and Dow Chemical.
2. John Paulson
John made a name for himself after making a spectacular bet against the US-based housing market during the crisis in 2009. The timely bet let Paulson and his company make $15 billion. As a result, John got a multi-billion position in one of the biggest American banks.
3. Jamie Dimon
A good example of how to use fear at your advantage. This is what Jamie did during the credit crisis. After making huge gains for JP Morgan, he also acquired Bear Stearns and Washington Mutual. Both were doomed to failure at that time. Each share cost him not more than $10. Today, Jamie is a billionaire.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.