How to trade panic and profit on panic selling
What is panic selling?
Stock exchange sales is a collapse, in which the supply of shares sharply increases and demand falls. Panic selling can provoke a financial crisis, stock market crash and even civil unrest. Investors regularly face a panic in stock markets. Panic sales can occur in individual stocks and can cover most of the traded securities on the stock exchange, bringing down stock indexes.
To understand how to behave during the stock market sales or how to try to make money on this, you need to understand the mechanism of this process and consider advice of professional traders.
How to minimize risks?
There are 3 main ways to reduce investment risks before the panic sale: diversification of risks, hedging and insurance.
Some analysts also recommend:
- trading for the sake of a good deal rather than money;
- ferociously defending your capital;
- promptly responding to bargain opportunities;
Remember, it is not so terrible to make a mistake as to get bogged down in your mistake for a long time. Other valuable tips from world renown financial specialists, managers and brokers include:
- Risk no more than 1% of the capital buying on panic.
American financier Stephen Burns, author of the blog for traders-beginners New Trader U, gives special attention to safety. In his article “Seven Steps to Survival During a Drawdown,” he notes that traders who are pursuing high yields should always be prepared for a market drop that can eat half of their usual income. In addition, Burns advises to reduce the volume of transactions by 50%, if the trader loses money. “Trade in smaller volumes, until the winning series of transactions,” he explains.
- In bear markets, either go short or go cash.
Such is a position of Oliver Tischendorf, a popular German financier. He adds that the key task of the trader is to save your capital during a falling market. Contrary to popular belief, successful traders are not those who have earned the most in the growing market. These are the ones who lost the least on the falling market.
There may be various reasons for panic on the market, be it unexpected cataclysm, negative report or a speech of a politician. After that position investors enter the game. They decide to close or hedge their portfolios or positions in specific assets. Then speculators can fix profits on the short positions, but there is no significant rebound due to other sellers. Also, psychological reasons should be considered. Learn more on minimization of risks and getting profit on a bear market with Capital Markets.