COVID-19: A Golden Opportunity for Traders
Travel restrictions. Sports events scrapped. Deserted high streets. Plunging stock markets. COVID-19 has made its mark and we’re on our way towards a recession. Businesses from all industries have experienced the ripple effect of COVID-19, forcing many to a grinding halt.
However, where there’s adversity, there’s opportunity. The tumbling market caused by the coronavirus has opened the doors for prudent investors to prosper if they adhere to risk management procedures. As Warren Buffet famously said during the 1987 stock market crash, ‘Be fearful when others are greedy, and greedy when others are fearful.’
The world listened and learned its lesson. Savvy investors have prospered during the dotcom bust, the 2008 economic crisis, and the Brexit referendum. COVID-19 presents its own set of obstacles, but the sell-off principles from previous historic crashes remain unchanged: buy the bounce, conform to shrewd risk management procedures, and accumulate wealth.
Profiting from market crashes
Traders spend their lives monitoring the market and analyzing trends, so one that is savvy would have foreseen the economic impact caused by COVID-19 and taken action. When markets crash, the good news is that eventually they are likely to recover. By investing in cheap stocks at a fraction of their original price, ideally when stocks have hit rock bottom, traders can make their money multiply considerably.
However, any wise trader will balance this up with forex risk management procedures. This is one of the most highly debated topics in trading because traders want to maximize the potential profit of each trade whilst cutting the size of each potential loss. Some general tips for reducing that risk include:
- Diversify your forex portfolio
- Implement stop losses
- Don’t risk more than you can lose
- Pick an area of the market and study it
- Create a forex trading strategy
The 2008 economic crisis
A bear market is when there is a constant decline in prices over a prolonged period of time in the market. This occurs when the sellers outweigh the buyers, making the prices of stock go down. The greater the disparity between the two, the steeper the decline. During the 2008-09 economic crisis, trillions of dollars were erased from around the world, instilling a widespread panic that caused people to quickly sell their securities. Others saw this as an opportunity.
Warren Buffet at the time famously invested $5 billion into General Electric with a 10% interest rate. What was the result? Billions of dollars. John Paulsen made a timely bet against the housing market, later anticipating a subsequent recovery in 2009. What was the result? Again, billions of dollars. Similarly, there is an abundance of opportunities to generate wealth in the midst of this pandemic.
Buying the dip investment strategy
Traders ideally invest when securities are at a low or on the verge of an upswing in a method of investing known as ‘buying the dip’. It makes logical sense and can bring huge gains, hence, it’s the strategy many are currently opting for.
Although the coronavirus has created a lot of investment opportunities, the market remains volatile. The difficulty is trying to judge when the market will be at its lowest: it’s not always certain a stock is worth investing in, despite a steep decline in price. If the situation is bad enough – very possible in the current economic climate – its value could plummet down to zero.
To reduce risk, traders identify a certain threshold at which they will cut their losses and sell the stock. This provides some protection, by limiting a trader’s losses if they’re wrong.
Short selling difficult during Covid-19
Short selling is an investment strategy that profits on the decline in a stock or security. Traders opting for this strategy only profit when the price of the stock decreases and make losses when the price of the stock increases.
You’d expect short selling to be a viable trading option in the current climate. However, this avenue has become a lot harder for traders in Europe, with many countries introducing stricter rules on short-selling. The idea is to protect the market as when the number of short investors exceeds those buying stocks – likely to happen because of COVID-19 – it could lead to share prices plummeting further.
Despite the economic repercussions of Covid-19, opportunity presents itself to traders who invest prudently. With the market so volatile, it’s difficult to judge when exactly it is best to invest. With strict risk management procedures, traders can mitigate the potential damage from miscalculated investments. On the flip side, by focusing on aspects of the market that they specialise in, traders have a better chance of timing the upswing correctly and profiting.
Readers are reminded that this article is not intended to provide investment advice.