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10 Tips For Trading In An Economic Crisis

Economic Crisis
Written by David

Bear markets have always been a reality of life and from the past we can see that there has been about 5 prolonged periods of pessimism in the stock markets since 1900, the last one which started in 2000 and may still be with us. These secular bear markets are sometimes interrupted by a few strong rallies like the ones we witnessed in 2009 and 2010. However, one common characteristic is that stock market indexes will fall short of previous highs and it won’t be long before the downswing resumes as it happened during the second half of 2011.

The stock market must be one of the few places where people not only ‘look a gift-horse in the mouth’ but will also try and think of a load of irrational reasons why they should shoot it in the head as well! Everyone knows they should buy low and sell high, so why is it so difficult for people to recognise when a really good opportunity appears and revert to the ‘follow the herd’ mentality of ‘it’s being sold down so it must be bad’! Everyone knows they should buy low and sell high, so why is it so difficult for people to recognise when a really good opportunity appears and revert to the ‘follow the herd’ mentality of ‘it’s being sold down so it must be bad’!

The City traders will always react to the tape irrespective of whether there is any reasonable justification behind what they are seeing. They have to trade their pot every day, all day, because that is what they are paid to do. It has all to do with the real-time price and technical analysis and nothing to do with fundamentals or any notion of value. But these are precisely the circumstances that occasionally provide startling opportunities for the rest of us.

A way to play this would be to have more flexibility in your trading and be willing to go long or short with equal ease. Here, you aim to trade the market swings; say selling at the top and buying back at the bottom, holding your money in cash for the periods in between. Although this sounds like a feasible strategy it is much harder to implement in practice and such a strategy requires good timing plus experience and discipline. It is also important to remember that what looks cheap can get a lot cheaper.

Keep in mind that for every investor or trader willing to buy a share in the belief that it will rise in value, there is a market participant who has lost confidence in the stock and believes it may decline in value in the future.

Used prudently spreadbets provide a cost-efficient and flexible way for experienced investors to trade on the political risk and uncertainty surrounding the Eurozone that have overshadowed financial markets.

What does the Eurozone Crisis mean for Spread Betting Markets?

If there’s one thing dominating the financial sections of newspapers these days then it’s the eurozone crisis. Take your pick – liquidity crisis, debt crisis, banking crisis, economic crisis, confidence crisis, investor crisis, jobless crisis… Whatever your view on the euro and the EU, there’s no doubting that the region is facing huge challenges at the moment that could threaten the very existence of the single currency and have a major impact on economies around the globe.

Depending who you ask, some analysts will tell you that the eurozone is doomed, while others will tell you there’s far too much riding on it for the Europe’s leaders to let it fail. One thing is certain though, what’s going on in Europe at the moment is one of the major drivers on movement across nearly all major markets, from indices to forex to commodities.

So, while it might be tedious keeping up with each new EU summit, every European Central Bank announcement and each new credit rating downgrade, successful spread betting on indices or anything else demands that you do just that.

One of the biggest examples of how the eurozone is impacting markets at the moment is with forex. Generally speaking, each piece of bad news for the eurozone will see the value of the euro drop against the dollar and most other major currencies. But this will also have a knock on effect on other currencies – in particular the pound, with traders adamant that what’s bad for the eurozone is also likely to bad for the UK, linking the two currencies together.

The crisis is also having a big effect on indices, such as the UK 100, France 40 and Germany 30. Fears over an implosion in the eurozone have made traders particularly jittery, leading to extra volatility. However, this situation sometimes leads to interesting quirks. For example, Standard & Poor’s recent downgrade of nine eurozone countries, including France, had a surprisingly muted impact on indices, suggesting traders had already seen it coming and priced it in.

I suppose the bottom line is that the situation and what it will mean to global financial markets is fairly unpredictable, but keeping up with the latest developments is essential in informing your trade position, no matter what market you’re betting on.

10 Tips For Trading In An Economic Crisis

The stock markets tend to take into account the longer term picture when pricing equities, commodities and currencies. This means the markets looks to take into account all the factors that may have a say in the forseeable future, as opposed to just looking at the present.

  1. Be prepared to lose

Trading the markets is risky, even more so considering the turbulence of the current markets. Don’t ever assume that winning in the markets is easy, it’s not. So be prepared to lose. Make sure you can afford any downsides in your trading and assess your situation regularly.

  1. Keep a level head

Yes, there’s a lot going on, a lot happening, huge firms crashing, governments nationalising other companies, but keep a cool head and try not to get sucked up into the hysteria.

  1. As Warren Buffet Said – Beware of geeks bearing formulas

Technical analysis and market behaviour mathematical simulations are interesting and sometimes effective tools. But beware of anyone who promises you a ‘black box’ that will boost your trading performance to giddy heights. As the saying goes ‘if it’s so wonderful, why aren’t they using it themselves!’

  1. Use Trading Insurance

If you aren’t used to using limit and stop losses in your trading, it’s time to learn. An effectively placed stop or limit order can act as insurance in case the market moves against you. They can also help you efficiently extract your profits in an ordered and sensible way, as well as taking some of the emotion out of trading decisions.

  1. Stay Vigilant

There is no excuse for carelessly missing good opportunities or allowing your positions to turn against you due to lack of vigilance. Keep your enemies close but your trade positions closer.

  1. Diversify

If you’re like most traders, you probably have a single or small group of markets you like to trade. This is the time to get out of your comfort zone and see what else is out there. How about gold? What about other commodities? Maybe certain developing economies will offer good opportunities. When the top world markets have been hit so hard, it pays to look around and keep your options open (no pun intended!).

  1. Invest in yourself

How can you improve your knowledge of how the markets are operating? This might be a good time to scale down your trading activities and get a better understanding in areas you lack knowledge in. There are too many traders that get into trading without knowing any of the economic or financial fundamentals that impact their investments.

  1. Gather Your Intelligence Carefully

With the easy of access to information provided by the internet, it seems everyone is a market expert these days. Be careful who’s market predictions you’re listening to and try to gather your own intelligence as much as possible.

  1. Think Laterally

Think about the relationships between various markets, what happens to airlines when the oil prices fluctuate. What impact will new technological discoveries make on current market leaders. Look at the non-obvious links between markets and world news events to help you predict changes in the market landscape.

  1. Stay Positive

Sure there’s lots of bad news out there, lots to complain about, lots to be negative about. But there’s not point in being negative, eventually we’ll pull out of the slump, even if it takes a while. There also might be positive side effects like the growth and development of new industries and technologies that will open new opportunities for investors.

If we hypothetically reversed the current economic situation – The banks have money coming out of their ears, jobs figs are great, sovereign debt is falling, debt to GDP ratios are falling, more countries are joining the European union, the economic outlook is great and P/E‘s are above their 10 year average. Would we be looking for falling stocks and opening short positions?? No of course not, that would be financial suicide! So why are we doing that and looking for rising stocks and opening long positions in the current poor economic situation??

In any case trying to find a winner now is like trying to find a needle in a haystack, where losers are commonplace, no doubt the market will turn, but trying to pre-empt that could be a costly decision. We as traders are unemotional; we don’t care if the market goes up or down, (unless we are holding high risk oilers drilling in war-torn countries) so why worry about a falling market? We can go short as well as long.

About the author


I first cut my teeth in the Square Mile in the winter of 2002. I was young, fresh-faced and straight out of university; keen but maybe a little naïve about the way the investment world really worked… A few years ago I discover a whole new world of opportunity: spread betting on the financial markets.

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