A couple of days ago I released an article detailing how market crashes are far more common than people think, today’s article is going to be an extension on to what I was talking about in the previous article.
What I’m going to show you in this article is a trading method which, provided you follow the rules correctly, will never lose you money in the markets, I understand this is a bold claim to make, and this strategy is not without its drawbacks, The main downside to this method is that the opportunities to implement it are quite rare, when they do occur however, the potential gain to be made will be huge.
If you haven’t already, I recommend taking a quick read of my previous article on market crashes titled “financial crashes rare anomaly or everyday occurrence “ this will provide some background as to what causes market crashes as well as some examples of recent crashed which have took place over the last decade or so.
The idea of this strategy is based on the research I’ve carried out on various different market crashes seen throughout history. If you study crashes you’ll notice the market always recovers, it may take 1 year, it may take 5 but when it’s all said and done the market will always recover from where it fell to.
This presents opportunity ! If we know the market always recovers from crashes then all we need to do to make alot money is buy when they crash.
Example 1: CHF Crash
Above we have the crash on CHF as seen on the USD/CHF currency cross.
Had brought at the bottom of the crash right now you would be sitting on a gigantic profit ! In just over a month USD/CHF was already trading back near the pre-market highs before the crash. If you happened to be watching the markets on the day the crash took place I bet the last thought on your mind would have been to buy. Why ? Because you were too scared !
People are not taught to buy when the markets going down, its counter intuitive to what they have been told. Name me one trading book which tells people to buy into heavy selling ? Cant think of one ? Me neither. All the trading books I’ve read have always told me to follow the trend, if the markets are falling sell, if its rising buy.
What people must realize is financial markets cannot go down forever, at some point people will see the low prices as attractive for buying, which means they’ll buy and the markets will recover, how long will this take ? No one knows, all I know is through history when markets have crashed no matter how big they are or how many people they affected they always manage to recover.
Example 2 2008 Financial Crisis
Above is a chart of the DOW JONES Index during the 2008 financial crisis.
The two black lines mark the high and low of the crash.
The market high just before the crash occurred on 30th September 2007, and the low of the crash was seen on march the 1st 2009. In total that’s two years where the market fell. Now I remember when this happened all of the news after the market made the low was still negative, people were saying how the market was still going to lower even though it never did ! the media is the reason why people don’t buy during crashes.
Had you brought stock in the DOW JONES index any time after the market crashed right now you would be sitting on a big profit, even if you brought at the last high made before the crash happened you would still be in profit now. Most people wouldn’t do this, because all the news creates massive fear and panic within the markets causing everyone who holds stock or shares in companies to liquidate their trades.
Although I’ve only shown you two examples of market crashes you can look at any crash in history and realize the markets always recover.
Search google for the flash crash that occurred back in 2010, look at the huge drop that took place that day then look at where the market closed on the same day.
How To Implement This Strategy
The main concern people have when trying to predict when crashes are going to end is “how do I know when the markets will stop falling” ?
This is an entirely valid concern, no one knows when the markets will stop falling, which is why you need to trade crashes by buying things which you own. Trading currencies through a traditional online broker does not mean you own what you’re buying, if you go to your local post office and exchange pounds for dollars you own those dollars meaning no matter how far the price of the dollar declines against the pound you can still use the dollars to purchase items.
Conversely if you buy a stock or a share they will always retain some sort of value, if you trade market crashes using trading brokers where you don’t actually own what you’re buying or selling it means you will have to predict when the markets are going to stop falling, which is impossible for the most part, by buying things you actually own it negates the need for a stop order, meaning no matter how far down the market falls you’ll still have something you own which is worth money.
If you were to use a normal trading broker for trading market crashes it would mean you would need to put a stop on your trade ( because you don’t know when the markets will stop falling) but if you buy actual shares in the stock markets when the markets were falling you would bypass the need for a stop, because you actually own the shares.
When the big indexes crash like the Dow Jones – FTSE 100 – NASDAQ – DOW JONES What you need to do is invest into either buying stock of these indexes or buy shares in the companies contained within the index.
Of course I cannot tell you which stocks to buy as I don’t know before hand which ones are the likeliest to survive the crash, the best and safest way to implement the strategy would be to buy stock in the indexes. In other words you buy 1 share of the FTSE or Dow Jones, by doing this you bypass the analysis needed to understand which business are likely to survive the crash.
Although opportunities to make money from large financial crashes are rare, when they do occur there is a lot of money to be made for the savvy investor. Why do you think markets always recover from crashes ? Because smart investors always recognize value. When markets crash it’s like a 1 day sale you see in shops, the cost of buying something has been reduced to such an extent that everybody wants to buy ! Who wouldn’t buy when the thing they want has been reduced by 75% ? Traders don’t make the connection to how items get brought in the real world are the same as how currencies get brought in the forex markets.
If you wanted a T.V which was £500 and you walk past a shop one day and see the price has been reduced to £100 you would go in there straight away and buy it ! This is exactly the same as you should do when the markets crash. Nobody does this due to all the incorrect advice purported in trading books and education, people are taught not to buy when the markets are falling, only when there rising, follow the trend is the single most often repeated piece of trading advice, yet it remains a very flawed concept.
Had you “followed the trend” when the CHF crosses crashed you would have lost money.
A crash will occur in the future, it’s just a matter of time, in fact if you’ve been reading the news lately you’ll notice how some people are starting to say the markets will crash very soon, maybe this year ? If this is indeed the case then you will not have to wait long to try the strategy out.