There were a lot of worried faces today when the Dow Jones Industrial Average dropped some 450 points mid day. Excited faces that were full of joy just a day ago now looked very worried, and fearful, and this was reflected in the jittery responses of many traders.
As someone who had rode through several markets crashes including the Black Monday drop, and as a professional trader, what would be the best response when the stock market crashes?
Being in the stock market is not about being always right in the market. You could be wrong, and be caught , as I would expect many traders would be with this market crash, but it would be your response to the crash that could help you mitigate the losses and difficulties and let you ride through the storm and even to rebound strongly, in many cases, with a profit several months down the road.
At the onset of a market crash, quickly assess your overall portfolio. If you are still in profits, consider liquidating, I am talking about your overall portfolio, not individual stocks. This response is taken especially if you treat trading stocks and shares as a business, and it is the bottom line that counts. A profit is a profit, and your mentality is to manage your business as a fund. By doing so, you are protecting your capital and your profits. If you have separate portofilios involving long term position stocks and the short term trading stocks, it is the short term trading portfolio that warrants your attention. You will move back into the market later when stock prices stabilise and you would have a good chance to buy them lower.
If you are not selling your stocks, do not average or buy more stocks at a lower price immediately, until there are confirmed signs that the market has stabilised. It is like catching a falling knife when the market is dropping, and especially if the market drops are due to external factors. What is low today can become lower especially if the falling momentum increases as the day passes.
When a market has crashed, the mood will have decidedly changed from bullishness to bearishness. The first few days after a crash, there is confusion. It is during these moments of confusion that having a clear direction and a trading plan for bearish periods, would put you into focus with a clear way how to trade or ride out these turbulent times.
It is during a market crash that there is a flight back to quality stocks, and also traders will be exploring new avenues for making a consistent replacement income. When things look bad in the stock market sector, there would be many traders who will want to look at trading other financial instruments, such as currencies and forex. The forex market is active 24 hours every day, and represents the biggest financial trading market in the world. For the trader, as long as the sun rises and the sun sets, the world of trading continues, irrespective of its outward form as stocks and shares, futures and commodities or currencies and forex.
