Actions to take in a share price mini-crash

  • By Saidur Rahman

  • October 11, 2018
  • 7:45 pm BST

Whether you’re forex trading, trading shares or CFD trading, the market will go against you at some point simply because markets are erratic by nature. A share price can fall sharply in a matter of hours not because of any logical pricing factors or market data, but on what seems like a whim. It’s every trader’s dilemma: what should you do when these mini crashes come? Do you double down on your position, calmly walk away from it by selling or conceding a loss, or ride out the storm?

Take the example of what happened to Tesla a few weeks ago, when Elon Musk tried to teach short sellers a lesson. The Tesla CEO posted a cryptic tweet about his intention to take the company private at $420 a share. He followed this up by taking a few drags of cannabis during a live podcast a few days later. The market reacted wildly in both cases. It’s been noted that just as Musk was fueled by short seller disdain, they were eager to leave him with the short end of the stick in either case in return!

In other words, the subsequent share price following each incident had very little to do with proper analysis, the future of Tesla or market fundamentals. However, there was sentiment involved in the sense of personal sentiment regarding the CEO. This is hardly a technically sound driver of share price decisions, but that’s how the market works sometimes. How should you handle your portfolio of shares, CFDs or forex transactions in a similar situation?

A trading strategy that could help you in a mini-crash scenario

Here is a balanced strategy for moving forward, whether it’s in the context of CFD trading advice, forex trading advice or share trading advice:

● Positions even out over time, and going with the mass gut feeling is sometimes overly and prematurely reactive. Look for good deals or positions to enter elsewhere while staying put on the losing position.
● Double down on winning stocks or a winning position rather than acquiring losing shares cheaply. Of course, you could do both; it depends on the context. The advice that you should buy shares other traders dump to make a quick profit isn’t cut and dry, and that’s the whole point. When adding to winning stocks, make sure it’s from a winning company; there must be a correlation.
● Here’s when to add to your original position: The long-term prospects are good despite what’s happening in the interim. Some say Tesla is an example of this.
● Do not add to your position hastily, and do not wrangle your way out of it immediately. Keep in mind that your good trades will outweigh your bad ones most of the time, given enough time. If you have enough time, use it to study what’s happening so you learn from it in the future.

Pros and Cons

In the markets, as in life, there are no neat, definitive answers that always prove correct. On one hand, you could miss out on great bargains by not picking up cheap stock or entering a losing position knowing there’s a great chance it will swing your way. On the other hand, you could stay in a bad deal or position for too long, incurring unnecessary losses, when you could have spared yourself at least some depreciation.

Ultimately, there is no shortage of great opportunities on the market in any given scenario. The trick is diversifying enough and exposing yourself to more potential opportunity, not less. In a truly diverse, properly considered portfolio, the gains will inevitably outweigh the losses, and this will happen consistently over time.

Where can you find the next good opportunity? Emerging tech startups are a good place to start in many cases. The next big buzzword is “trillion-dollar technology”. If a tech billionaire is investing in it, you should probably follow suit.