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How to day trade when the market panics?

 Day Trading Market Panics

One of the things that traders should understand is that investors tend to shoot first and ask questions later. To put this into context, when investors are uncertain or fearful about something, they sell. This comes on the fact that investors are merely trying to protect the profits they made so far.

However, the selling can mean different things; from partly unwinding the positions to perhaps even fully unwinding the positions. In some cases, investors can also hedge their exposure by trading derivatives such as options.

There are a few things that investors don’t like and among these is uncertainty.

If you follow the news reports currently, the Coronavirus has been engulfing the global economy. One of the main reasons behind this is that investors expect economies to take a big hit. This stems from reduced travel, especially by air and lower revenues from tourism.

Over the past few months, this narrative has been building up. In the last week along (week ending February 28), European equities fell 12%. It was a similar story with U.S. equity markets as well, which were down close to 13%. This is called a correction territory. A further decline would send equities into bearish territory.

So amid such panic, the question is how day traders can trade during the market panic.

Beware of the erratic moves in the financial instruments

Although for most financial instruments, the direction is down, there is a high volatility as well. This means that prices are prone to erratic movement. Thus, a wrong timing on a trade entry would mean that you will end up with losses quickly piling up.

As an example, for the recently concluded week, even gold prices were down over 3.5%, following similar trends in equities and other risky assets. Thus, if one would apply the buy safe haven assets, it would have been disastrous. If you take a gamble and blindly buy the safe haven asset hoping that it would rise or take a short position in a risky asset hoping it would fall, you would be greatly mistaken. This is more of a 50 – 50 chance about your trading ending up in profit.

Day traders come to the table with the unfair advantage of lower capital and higher leverage. This means that if you are on the wrong side of the market, you would end up absorbing losses rather quickly. And combining the effect of leverage, margin calls are just around the corner.

Protect your open positions

Assuming that by some means you were in a trade and are correctly positioned in the markets, then the focus needs to be on protecting the profits you already made. This will mean having to make use of position scaling in order to book some rewards while also not leaving any risk on the table.

If the market continues to move in your favor, then the best chance is to let the trade continue. However, do not get too greedy as price can reverse with the same momentum (as witnessed with gold prices this past week).

This could lead to losing out all your unrealized profits. However, the big focus should be on not losing money during such times.

Follow the trends

Despite the noise made by news outlets, one of the main things to see is the prevailing trends. For example, looking back at the past few weeks, gold prices rose to a seven year high.

If one looked at the chart, they would easily know that gold was already in a bullish trend for over the past three months, if not more. Thus, the market panic simply reiterated this bullish trend in gold prices.

Likewise, if you look at the equity markets, all major stock indices were trading near new all-time highs. There were also clear signs of the gains being overdone. All it took was a market catalyst to trigger a sell off in the markets.

If you don’t know what you are doing, better to stay away

Trading during periods of market panic can either quickly give you big profits or it could easily wipe away your capital that you were building over the year. Thus, the most prudent thing to do is to simply walk away.

This is especially true if you do not know what the markets are going to do. It is easy to get one’s emotions involved at such times. Thus, getting your greed in check would be a great starting point.

The markets will continue to give many more opportunities for traders to make money. Thus, if you are late to the party, it is better not to dive in so you can save your invested capital for another trading day.

Read 184 times Last modified on Thursday, 12 March 2020 08:05

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