Amid Global Turmoil, Should You Avoid Trading?

3 Mins read

The recent COVID viral pandemic has had a profound effect on traders and investors all over the world. Many nations’ entire economies have all but shut down, and everyday activities like driving to work, taking kids to school, and going out to movies and restaurants have come to a halt. Virtually every sector of the global marketplace has taken its share of punishment, and millions of small businesses have already been permanently shuttered by the crisis.

Political tensions are also taking a toll, as a new era of combativeness between the super powers is making it hard to predict how the dollar, yen, pound, and other currencies will hold up. An historically important U.S. presidential election, the UK’s Brexit fiasco, and Middle East conflicts are part of the overall instability that seems to have taken over the global investment community. Every day it becomes more and more difficult to know how to protect retirement funds and other investments from uncertainty and market volatility.

global turmoil and trading industry
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Recent Examples of Wild Upswings and Downturns

Optimistic news and corporate announcements can have a huge effect on the price of securities in tension-filled political and economic climates. For instance, when one U.S.-based drug maker registered a pharmaceutical patent for a COVID vaccine, the company’s stock price shot up in a matter of minutes. A few days later, when there appeared to be problems with eventual FDA approval of the drug, stock prices fell back to their original levels. The potential to make money in a downward and/or volatile marketplace is the reason not to get out of the market.

Buying the Dips

For more than a century, investors have used a clever tactic to earn profits in troubled and uncertain markets. They buy the dips, which means they watch seesaw prices and do their best to buy in on each successive downswing. By studying a company’s price behavior in the midst of sideways trading periods, it’s possible to catch at least of few of the short-term bottoms, make buys, and then sell at the next top.

Short-Selling Tactics are Powerful Tools

Those who can handle the uncertainty that comes with markets in which the bottom could fall out at any moment often turn to naked and/or covered short-selling. Their expectation is that a company’s shares are headed downward. If the investor turns out to be correct, shorting can be one of the most effective ways to earn a profit in negative markets. First, it’s helpful for new investors to get an explanation on what is short selling. Simply put, it’s the practice of agreeing to deliver shares to someone else at an agreed-on price on a specific date.

If ABC Corp. is currently listed at $45 but you believe the company is headed for major trouble, you might be able to find a willing buyer, who will accept your offer to deliver 100 shares for $40 each, one month from today. If you don’t already hold that much ABC stock in your portfolio, this deal is a naked short-sell. If you do have the shares on hand, it’s a covered short-sell. If, as you predicted, ABC tanks and the price dives to $10, you happily fulfill your end of the bargain by delivering said shares, which will only cost you $10 each to acquire, on the agreed date. Compared to the $4,000 you took in, your cost of $1,000 for the devalued shares means you turned a $3,000 profit on the decline in ABC stock.

Short-Term Tactics

As noted above, both short-selling and buying into dips are possible ways to make money on short-term movement. Another technique suited to short time horizons is called scalping. Scalpers use leverage and/or large buys to make profits from very small moves in price. In essence, all day-traders are scalpers because they never hold a position after the close of market. But true scalpers often work within time frames as short as one minute, hoping to profit from minuscule ups and downs in share price, often as small as a few cents.

Long-Term Strategies

The complete mathematical and philosophical opposite of scalping is to buy and hold. It’s an approach that’s also geared for volatile times but is not designed to make short-term gains. Instead, buy and hold advocates are optimistic about the long-term performance of a given security. They don’t care about one day, one month, or even one-year scenarios. Since the COVID crisis hit in early 2020, many traders took their cash out of short-term activities and bought blue-chip stocks with an eye toward making a profit once things return to normal and the bigger companies surge back to pre-crisis strength.

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