5 TRADING MISTAKES YOU SHOULD AVOID

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Free course

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Free course

Stock Market Crash – What do you do?

Stock Market Crash – What do you do?

Australian Investment Education

Stock Market CrashOn the twelfth anniversary of the September 11 terrorist attacks in the United States, I thought it prudent to review what constitutes a stock market crash, and how you need to manage your stock investment portfolio.

Fear is a key driving force behind market sentiment. It fuels fast falling markets, and inhibits upward moving markets. The Fear of loss, or possibly more correctly the fear of admitting loss, can be a paralysing factor that can devastate the most experienced of traders.

The stock market is all about numbers. And numbers mean statistics. Some of the horrific statistics from the Sept 11 terrorist attacks include; During September 11, 2,753 people died in New York when the World Trade Centre buildings were hit by commercial airplanes, commandeered by terrorists. The first plane slammed into World Trade Centre North Tower 1 at 8.46am. The second plane crashed into World Trade Centre South Tower 2 at 9.02am. Since then, not only the investment world, but the world in general has changed forever.

On any given day, the number of workers in the World Trade Centre would average 50,000 people, with an average daily number of visitors at 140,000. The event led to the closure of US stock exchanges for 6 days, and the subsequent stock market crash saw a fall of 684 points on the DOW Jones Index.

But a one off event is not the only situation when a stock market crash might occur. Single events such as Sept 11 will normally find a quick rebound. An economic Recession is a major catalyst to a stock market crash, especially if that Recession turns into a Depression. We also have geopolitical change such as the Oil Crisis in 1973 or the Asian Currency Crisis in 1997. And in the more modern world of investing, we have a new phenomenon called the Flash Crash.

We have outlined the key categories of a stock market crash:

  • Generic Market Crash – such as 1987 Black Monday
  • The Bubble – including the 1637 Tulipmania and the 2000 Tech Bubble; the classic speculation crash
  • Tight economic money flow – 1907 stock market crash, 1997 Asian Currency Crisis, and the 2007/08 Global Financial Crisis (GFC)
  • The Flash Crash – the new/modern computer panic where an erroneous trade or trading error triggers everybody to follow. Especially the computer algorithms which automatically transact no matter what the reason.

Let’s take a look at some of the statistics for these various categories of a stock market crash:

Black Monday 1987

On Oct 19, 1987, the Dow Jones Industrial Average fell 508 points or 22.6%. It had peaked around 2,722 before declining to 2,246 the day before the market crash. This is a decline of 17.4% in the leading index prior to the actual crash – a sizeable decline.

This crash created a rapidly changing and chaotic environment, one which traders had never experienced before. It was a new age for the stock markets with computers driving transactions, and the biggest even since the 1929 Great Depression.

As stock prices fell, the difficulty in the technological ability of computer systems placing multiple trades and the issue of sizeable margin calls, all contributed to fuelling an even greater stock market crash.

Within a few months, the DOW Jones was trading back at the levels it had previously been trading. Only about 25% of Americans owned shares during this period, so the fear driven from this stock market crash actually had very little direct impact on the population.

The lessons here are that a sizeable decline in the market preceded the actual stock market crash. But once the event had occurred, it turned out to be the best buying opportunity for a generation as stock prices trended upwards for the next 13 years.

September 11 2001 – Terrorist Attacks

Following the 6 day closure of the stock markets, trading resumed on the 17th September, resulting in the DOW Jones Index falling 684 points. It continued sliding until the 21st Sept, reaching a low of 8,062 points (the previous peak was 11,350 on the 22nd May 2001 – a difference of 3,288 points or 28.9%).

By the 26th October 2001, the DOW had recovered to the same level prior to the terrorist attacks. This means, the actual event lasted no more than a month and a half. The markets continued rising following this recovery, although failed to attain the long-term high until March 2006 – 5 years later.

The stock markets were only just recovering from the 2000 Technology Bubble, and investor confidence was still quite weak. The event stirred a panic sell-off of stocks, and certainly created a great deal of disruption to the financial systems that run the stock market. However, as fear abated over the coming weeks, investors started buying stocks and the markets/economy continued in their previous fashion.

2010 Flash Crash

The DOW Jones index fell more than 1000 points on the 6th May 2010, that’s 9%. Recovering within minutes, but creating this new phenomenon called the Flash Crash.

Global economic concerns were already entrenched in the mindset of investors prior to this stock market crash. In particular, the debt crisis that plagued Greece for many years.

It was found, upon later investigations, that a single large trade was able to send stocks into a downwards spiral due to the fragility of market sentiment. A large mutual fund firm sold an unusually large number of e-Mini S&P500 contracts, exhausting available buyer liquidity, enticing high frequency traders into the market who started selling aggressively. Sharp price falls ensued, and this triggered algorithmic trading platforms.

Although the DOW Jones had already been declining on the short-term, the Flash Crash did cause a change in trend with a sideways range forming over the next 4-months. But this was a temporary action, which was soon explained, and the long-term uptrend resumed by October.

The lessons learned from stock market crash situations, are:

  • You should have plenty of signals that an impending situation is about to occur, especially if you have already seen the markets change trend and decline sizeably.
  • When the crash occurs, it is usually already near the bottom. It is the retail investor who panics and sells, not the professional.
  • Patience can help provide great reward if you have available investment capital
  • The type of stock market crash can dictate how severe it will impact on the broader market. The less ‘warning’, that is declining market, the quicker the recovery and the impact on the overall markets.
  • There are always opportunities that present themselves during a stock market crash. You need to know what to look for, and not fear what has already occurred.

Matthew Brown – US Stocks & Options specialist
US Equity & Option Client Advisor
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973

If you would like to learn more about the strategies you can use to profit from any type of market direction, visit http://australianinvestmenteducation.com.au or you can contact Matthew on brown@halifaxonline.com.au

Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.

about Matthew Brown

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...

Follow Matthew Brown on Google+

Comments

  1. Kamala Bryce says:

    Leave a message

leave a reply

Your email address will not be published. Required fields are marked *