Market headlines aren’t exactly sounding cheery these days, leading some to worry that another crash may be looming.
How can your account survive if this happens? Here are five tips to keep in mind:
1. Stay rational
This is simply a more constructive way of saying “DON’T PANIC!”
Sure it can be unnerving to see market heat maps all flashing red, so you gotta remind yourself to keep a cool head and focus your energy into looking for profit opportunities.
Of course this is actually easier said than done. Not everyone can stay calm and collected when watching their portfolio bleed out.
Take a couple of deep breaths and a few minutes to answer questions like these before taking any action in the heat of the moment:
- Are there any changes in fundamentals that suggest it’s better to cut losses?
- Did market sentiment shift against your trade?
- Is the asset still trading within its usual volatility range?
2. Don’t be greedy
On the other hand, let’s assume you’re able to bank on big market moves and makin’ it rain.
Should you keep pressing your advantage?
Under normal circumstances, probably. But during market crashes, you might want to consider playing it safe.
You see, investors are extra moody and sensitive in times like these, so risk appetite can shift on a dime.
Even the slightest whiff of a rebound or positive development can lead to a sudden rally… before the gains are sharply unwound later on.
If you’re already looking at decent gains from a particular setup, you might be better off taking the profits. Just call it a day (and a bird in the hand), especially if you can’t keep your eyes on the charts for a long while.
Either that or adjust your stops to lock in some winnings or close part of your position just in case the market swings wildly against you at some point.
3. Be mindful of leverage
Leverage is a double-edged sword, which means you might end up gutting your portfolio if you don’t wield it properly.
While leverage gives you the ability to trade positions larger than your balance, it can also wind up closing your entire account if price moves against your trade.
As briefly mentioned earlier, asset prices tend to spike around when investors are feeling jittery.
Even though your analysis is spot on and you got the general direction right, you could still wind up getting the dreaded margin call just because Mr. Market has a nasty mood swing.
4. Look into other asset classes
Trading during a market crash is not as simple as shorting everything.
Some markets don’t even allow short-selling while others have circuit breakers that prevent prices from tumbling any lower.
If you decide to stay out of the markets during a drastic selloff, you could use the time to learn about other asset classes and financial instruments that could offer better profit opportunities.
If you’re already dabbling into other markets, you could also consider rebalancing your portfolio to account for changing risk levels in stocks, commodities, or bonds.
5. Learn from previous market crashes
Lastly, reviewing how the markets fared during previous recessions would also give valuable insights on how to manage the ups and downs.
For instance, recalling that the 1929 stock market meltdown sent equities tumbling by nearly 90% over a span of three years would bring some perspective to rallies and pullbacks.
Spotting the similarities and differences among these market crashes would help you stay alert to patterns that could play out again and remind you to always keep your guard up.
Promoted: The Strategy is Half the Battle; Your Mindset is the Rest.
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