Profiting from Market Declines and Crashes

Until this day you hear people talking about the 1987 crash, the burst of the dotcom bubble is in everyone’s memory, and just recently, in 2008, the subprime crisis triggered a whole bunch of events, that, in my opinion, haven’t been figured out until this day.

Now only eight years later, markets are taking a beating like we don’t see every day in trading, again. Not only have the World Indice markets started off with the worst first two weeks of January in history, the volatile and downward-oriented price action tends to continue to dominate even further into 2016.

Putting it all into perspective, we can see how much worse these crashy or, if you don’t agree with that term, bearmarket moves have come to be. 1987, on a chart, seems like a joke to what we’ve seen 2008 and what could be waiting for us down the road in 2016. A weekly recap of this week’s market action follows over the weekend, for now I would like to point out just how much volatility today’s markets carry.

The reasons for this increased volatility can be found in various aspects of the financial world as well as many other parts of life, actually.

Globalisation in general, I think, is a main factor why some perceive that markets have changed in the last ten years. Not only has the introduction of electronic trading spurred on a revolution in regard to how traders form their perspective and trading approaches to markets. There are other factors such as the sheer number of market participants that nowadays are provided with easy access to any financial market around the globe. The technological revolution and centralized money-flow systems are just another aspect. The list goes on and on, reduced minimum requirements to open a trading account compared to the 1990’s, trading education materials everywhere, new trading products etc.

Just like many times before all of these factors add to the fact that markets are changing. They are changing every day, which is something that probably no one notices. Over time though, rougher differences to previous market phases can be observed. Not only the change from trending to correcting would be an example, fundamentals such as the number of participants, general public interest, cash amount, access etc. have an impact on the ever-changing nature of markets.

If you are really serious about your trading, if this is not just a summer-hobby to you, if you are willing to put in the work, to finally realize what it takes to achieve some kind of success, and then follow your path so that after years and years you can be a profitable market participant, you want to come into this field with a robust, backtested and comfortable appraoch, that you are able to execute perfectly.

It doesn’t really matter what that appraoch is, as long as it defines very precise entry, stop and exit rules. As long as it factors in Money Management and as long as you are constantly taking care of your psychological well-being, any strategy will do.

Such a strategy will have the parameters set to get you into your trades and exit them at an appropriate point of time and price, when it’s necessary. Such a strategy will have precise exit rules, that make sure your average win vs. average loss ration can actually make you profitable.

Using these principles bearmarket and crash type of market phases will not scare you. The opposite is the case, they will amuse you. That is simply due to the fact that you are profiting from any market movement, whether it is up or down. As a trader you are not judging whether the market movement is good or bad, it is there, so it is our job to fullfill going short in a crash or bearmarket, since it’s our goal to make money. We need it to survive.

Taking a look at a long-term index chart (Dow Jones) we are examining how a robust system, designed to make money in different market phases, takes care of you during a crash or bearmarket. I am not saying it delivers the greatest results each time, but catching the bigger portion of a significant market decline can yield nice profits, that goal wasn’t achieved so much in the burst of the dotcom bubble 2001, but even more so in 1987 and 2008. Whether 2016 will be another profitable bearmarket, whether it will even be a bearmarket nobody knows yet, but the Weekly Recap published over the weekend takes a look at current market behaviour and determines opportunities to enter.

A moral issues arises, too, when trying to take profits from major market declines where most people on the street suffer and lose. It is up to you to determine whether to trade these kind of scenarios, or if you rather stick with a long-only approach. Both can be done, both can be profitable.

2 thoughts on “Profiting from Market Declines and Crashes

  1. Hi Mr. Fractal Trading. Very interesting. I have just found that using the FT free charting you can look at the DOW back to April 1914. Check out the 1929 crash. Check out the chart attached for the DOW from July 1928 to September 1932, regards, Pearse(Zohar Trading).
    http://markets.ft.com/research/InteractiveChart?symbol=599362&options={“StartDate”:”07/01/1928″,”EndDate”:”10/01/1932″,”LowerIndicator”:[],”UpperIndicator”:[{“Args”:[{“Type”:0,”Value”:34}],”Code”:1,”UID”:1539574429},{“Args”:[{“Type”:0,”Value”:13}],”Code”:1,”UID”:1557792903},{“Args”:[{“Type”:0,”Value”:200}],”Code”:1,”UID”:31811768}],”Overlay”:[3],”ChartStyle”:1,”ChartScale”:1,”CursorStyle”:1,”Interval”:7,”Duration”:12,”Comparison”:[],”PortfolioName”:null,”Width”:950,”Height”:400,”ActiveTool”:null}

    1. Hi pearse!
      I never actually looked at the 1929 crash, thanks for pointing it out at this point. Following your link I get charts from FT, in the Dow Jones back to 1960, not more?!
      But I looked at the 1929 scenario using ProRealTime.com (free EOD+ charts on pretty much everything).
      Dropping from 386 down to 40,60 – in a move no questions asked. Despite what this market phase meant for the public, it was an awesome trend :)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s