Trading a Stock Market Crash!
Stock markets have crashed and will continue to crash for as long as they exist. Everyone literally knows that, yet a rare few properly manage to deal with it. Many are essentially unaware that a crash is already unfolding; well, at least until a few weeks or months after the fact. Others, continue to deny it wishfully hoping for a recovery. However, everyone keeps asking the very same questions. Should I sell and get out now? Should I wait a little longer? Do I rather buy and average my losing positions? Should I do nothing at all and turn into a long-term investor? This editorial will, once and for all, answer those basic questions and point you to the right direction.
Let's first define a crash and how to identify one. So as far as stocks are concerned, when major indices drop more than 10% and particularly in the ranges of 15% to 20% or more ,then this a crash. Any other decline of 10% or less is labeled a "correction", after which, stocks would be expected to resume their upward course. So if you know absolutely nothing about technical analysis, the above levels should provide enough guidance for you to detect and differentiate between a "correction" and a "crash". Now suppose you have correctly identified a crash, what exactly should you do?
Sell, sell, sell and "Get Out" until further notice! Now obviously, you will keep hearing disguised words of wisdom telling you not to panic, that stock markets go up and down, that you should always look at the long-term time frame, etc. etc. Well, what if that very same long-term time frame is negative, and literally crashing?! Let alone the recommendation to buy more, and average down your positions! Please do "NOT" do any of this, and "NEVER" try to bottom fish the market!
Let's assume that some people are good at picking market bottoms, so they start buying whenever they sense that the stock market is about to bottom. But since no one could possibly direct the market with a remote control in hand, this bottom fishing could take from a few weeks to several months. Now let’s assume you’d rather wait until a bottom is identified, i.e. when major indices rise more than 10%-15%, and then you’d jump in, wouldn’t you still be buying at almost the same levels at those bottom fishers? Actually, you’d be in a much better position, because supposedly you’d see immediate profits since you bought at the start of a new bull trend, rather than near the end of a bear one. The point is, time is money. Think about it!