A lot has been written about the current market environment. HSBC recently released a note to their client stating that the market is about to crash. Famed bond king, Bill Gross recently stated that the current trends in the bond market would lead to a supernova market environment. Republican presidential nominee, Donald Trump in the first debate claimed that the market would crash as soon as the rates are hiked. Other money managers such as Jonathan Gundlack and Carl Icahn have also stated that the market will soon crash. They have cautioned investors to remain hedged to prevent a downside. In this article, I will highlight a few ways to trade during an hypothetical stock market crash. This article does not take the predicted crash at face value. I have advised for a long time against believing the famed investors because many of them have been wrong for many years.
#1 - Lucky to Be a Trader
The first thing you need to know is that you are very lucky to be a trader. As a trader, you get into trades and leave within days or minutes. You buy Facebook today at $100 a share and then exit tomorrow when it hits $102 making a good profit. You are lucky because you are not an investor who does a lot of research and then buys shares of a company and wait for a dividend. The disadvantage of being such an investor is that you can’t exit just like that if a stock market crash happens. If you exit early, you will miss the dividend. Also, you are not sure whether your thesis will be the correct one. Therefore, you are very lucky to be a trader. You can make money during a bull market and during a bear market.
#2 - Always Take Short Term Trades
You are trader. You should therefore avoid taking long-term trades. Doing this will put you into a very tricky situation especially when the trade fails to go in the right way. You should focus on benefiting from short term market moves. For instance, you should perfect the art of buying in the morning and exiting the trade by afternoon. By doing this, you will not be affected by long-term price actions.
#3 - Be Hedged
Another strategy you can use during a stock market crash is hedging. It is also known as arbitrage. In this strategy, the idea is to buy and sell at the same time. In fact, you can do this using the same instrument. For instance, if you have $1000 in your account and the share price of company X is $10. In this situation, if you believe the share price of X will go up to $14 within a day, you can take $600 and place a buy trade. This will give you 60 shares. Then at the same timed, you can place a sell trade on the same company using the remaining $400. If the share price goes up, you will make your money while losing the smaller lot size you sold. You can apply this strategy for other trades. Remember, your thesis should direct the lot size you chose.
#4 - Always Have a Stop Loss
In all your trades you should ensure that you have a stop loss. A stop loss enables you to stop the trade when a certain level has been reached, like an hypothetical stock market crash. Having a stop loss enables you to lose only the amount you are comfortable losing. If you have $1000 in your account, you should have a stop loss at $-200 if you are comfortable losing a fifth of the account. Doing this will help you reduce the risk of losing more money than you can handle.