The Current Financial Meltdown and Lessons for Traders – Introduction
On 2nd February, the Bureau of Labor Statistics (BLS) in the United States released the jobs numbers for the month of January. These numbers beat the estimates expectations, with the unemployment rate remaining at 4.1%. In economics, a rate below 5% is referred to as full employment.
This news was positive to the United States and the conventional expectation was that the dollar and the U.S stock market would gain. Furthermore, the data showed that everything was going on well with the economy.
Sadly, this was the start of a long bearish move among the U.S equities. On that day, the Dow index ended the day down 600 points.
The following week, the volatility moves continued with global stocks entering a bear market. Stocks enters a bear market when the index falls more than 10% from its highest point.
At the same time, the volatility, which was at the lowest point last year shot up from a low of $10 to a high of $40. The chatter among global investors was that the much anticipated correction had arrived.
There were two main reasons for the crash. First, after the positive economic data, treasury yields skyrocketed. As a result, investors took their money from stocks to the treasuries. Secondly, the talk was that inflation had arrived. With inflation, investors expected treasury yields to rise.
In the last week, global investors have lost tens of billions of dollars during the crash. At the same time, the investors who believed that the volatility was to move up made tens of millions of dollars.
All this shows why trading is better than being long term investors. As the market crashed, traders exited their positions when the stop loss was triggered. Then, they entered short positions and made money as the financial market crashed.
On the other hand, long term investors had no choice but to hold onto their positions. I believe that this is a wrong model of managing money.
For sure, there is a likelihood that the stock market will recover. Therefore, if the investors exited their positions, chances were high that they would buy the same assets on the cheap.
At Day Trade The World, we are strong advocators of having a long-term view of trading, while doing day trading. By this, we are advocates of having people buy and sell financial assets with a short-term view.
A good example is what happened during the 2008/9 crisis. During this time, investors, including the likes of Warren Buffett ended the year in the red. Later on, they recovered from their losses. However, in that period, traders like James Simmons made billions of dollars because they were agile. Their trading adopted to the situation at hand.
Therefore, this crash is an excellent example why trading is so important. It is an illustration why being a trader is much better than being a long-term investor. If you practice proper risk management, there are high chances that you will make more money even during periods of high volatility.
In addition, since volatility has risen, this is the best time to be a trader. This is because volatility brings more swings among the financial assets. It makes it easy to spot the best positions to enter and exit positions. During a Bull Run, it is usually very difficult to spot entry and exit positions.