How You Can Profit in a Financial Crisis
Yesterday I told you about how I survived the 2007-2008 financial crisis.
At that time, the U.S. was close to experiencing a complete economic collapse.
Much has been written about what happened, the events that precipitated the crisis, and whether or not we’ve learned our lesson.
But the burning question still is: Could it happen again?
The Importance of Being Prepared
“How could this happen?” was the battle cry of many during this time.
It became very evident that a ton of people weren’t prepared for such a crisis. Many people lost staggering amounts of money. It was a bloodbath.
Yes, the government and the banks exhibited some bad judgment and tried to fix things with band-aids during this time. But investors had become complacent too, believing that these banks were “too big to fail” and trusting them.
As an investor, you need to be prepared. You cannot simply put your trust in entities or corporations. Things will come along that can shake your foundation. You don’t want to be one of the ones who loses everything.
My Strategy to Profit From the 2008 Financial Crisis
You could call the market during 2008 an extreme example of a bear market, where consumer trust is low. Happily, my trading strategy works in both bull and bear markets.
Because of this, when the financial crisis hit, I didn’t lose money like the majority of Americans. I actually made money. I’ve continued to use this strategy over and over again over the years, refining my methods as I go and teaching my students how to use them too.
I don’t necessarily focus on diversifying my portfolio or having a wide range of investments.
Instead, I focus on these strategies and techniques …
Trade Volatile, Low Priced Stocks
I look for low-priced stocks that are experiencing great volatility. The idea is that I can look very closely at these stocks and gain profits by taking advantage of predictable price fluctuations.
I don’t necessarily care what kind of company it is. I look at the numbers and the volatility and follow where I think I can make profits. This is where I have found the most reliable and steady profits as a trader, so it’s what I focus on.
Let’s get one thing straight: You can never fully know how a stock will perform. There are too many factors at play in the market to ever know 100%.
I don’t win all of the time. My track record is about 70%, as you can easily see by looking at looking me up online, where I track every trade.
How do I earn profits so much of the time? By relying strongly on technical analysis before making any trades.
Stock analysis is the process by which you analyze stocks. This covers a variety of methods that traders employ to review historical data on a stock in order to determine how it might perform in the future.
Stock Chart Patterns
One of my favored methods of technical analysis is to look at stock chart patterns. Here are some of the things I’m looking for:
- Has the stock’s price moved in ways that seem predictable in the past? Does it have a prior history of gaining?
- Does the stock seem to follow any trends? For example, when you look at the stock’s chart over weeks and months, do you see that the price goes up at the beginning of the week, or down after certain major holidays? Is there possibly a seasonal aspect to it?
- History repeats itself closely enough that it’s worth considering. When you look at the history of the stock, are there any other patterns that seem to be predictable or reliable in any way?
Pay Attention to Chart Breakouts/Breakdowns
Let’s talk for a minute about chart breakouts and breakdowns.
- Breakouts are when a stock price moves, with volume, outside of a specific support/resistance level. This can be a sign to buy. You already see movement in the stock, so the gains may not be great, but it does present an opportunity.
- Breakdowns are all about movement in the opposite direction. A breakdown occurs when the stock price goes through a specific support level. Usually it’s characterized by big volume and big declines.
These are some specific things you should look for in charts as well, because they can alert you to not only stocks but sectors that are experiencing movement.
Level 2 Price Action
I like to take my trading to the next level …literally. As you can read in my detailed post on the subject, Level 2 is defined as:
“A trading service consisting of real-time access to the quotations of individual market makers registered in every Nasdaq listed security, as well as market makers’ quotes in OTC Bulletin Board securities. This allows you to watch the trades being executed right in front of you. Also known as Level II.”
Level 2 can give you great insight about the stock’s price action. It can tell you things like what types of traders are buying/selling, whether the stock is going up or down in price, and more.
Here’s an example. Say an order is placed. Level 2 will give you a ranked list showing the best bid/ask prices from each market maker participant. It tells you how much people are willing to pay for the stock and how much they are willing to sell it for. It can also tell you if there are any big pending orders.
Basically, you get to know who has an interest in the stock. This can be very useful for day traders.
Go Long in Bull Markets
A bull market refers to the times when prices are rising, or there’s an expectation that they will rise. There’s a lot of optimism, high expectations, and general investor confidence during bull markets.
Remember, the market is cyclical, but the timelines can be hard to predict. Usually, a bull market is characterized by a 20 percent rise in stock prices, often preceded by a drop and prior to a decline.
Often enough, a bull market is only definable after we’re already in it.
Bull markets are the time to hold on to investments longer, as they are more likely to appreciate in value.
Go Short in Bear Markets
When it comes to a bull versus bear market, there’s never a back and forth switch. There are some natural pullbacks, but the 20 percent rule detailed above over a period of two months or more is usually when it’s considered a switch into a bear market.
In a bear market, the prices are falling, or there’s an expectation that they will fall. This causes bigtime pessimism and low expectations. People are stingy and cautious, and that keeps the market in decline.
Because the prices are going down, bear markets are the time to take advantage of short sales. However, you have to be extremely diligent about your studies when choosing stocks to short, especially in times of crisis, when your losses could mount quickly and very frighteningly.
Keep in mind that you have to maintain a level head about shorting. Even with the best setup, you might not always have the shares available from a broker.
File under “duh”: In a time of financial crisis, everything is heightened — passions, panic, and yes, risk.
So what steps can you take to manage risk and ensure your own financial safety? Here are some of my top rules to live by for risk management:
Cut Losses Fast
I almost wish I could post this in 60-point type for effect. My students know that cutting losses quickly is one of my biggest and most important rules as a trader.
You must be on top of your trades at all times. Even if the same pattern has worked 99 times in a row, it might not work the 100th time. This is very hard for traders to wrap their minds around, and it often leads to big losses.
There is never a guarantee that a trade will work. There are too many factors at play that you don’t know about that can affect the outcome. So you have to always be willing to cut losses.
A trade isn’t going to magically turn around if you wait patiently. In fact, this way of thinking is more likely to make you a money-hemorrhaging bag holder than to reward your patience.
If you see that a trade isn’t going according to plan, don’t hold and hope. Cut losses quickly. Yes, it’s hard and it can hurt. But you’ll usually end up losing less in the long run.
For many traders, taking smaller positions can be helpful in this regard, because if and when they do need to cut losses, it makes less of an impact.
Key Tips for New Stock Market Traders About Crisis Scenarios
In times of crisis, it’s more important than ever to keep a level head. Trading psychology is more important than ever because you have tensions running high and stock prices going berserk.
With that in mind, here are some key tips for new traders about how to stay calm and weather the storm during times of financial crisis:
Small Profits Add Up Over Time
Remember that TLC song? “Don’t go chasing waterfalls… please stick to the rivers and the lakes that you’re used to”? Yes, I just managed to incorporate a 90s R&B reference into day trading. Cheesy as it may sound, this concept is appropriate to trading.
If you want to have a steady and reliable career as a trader, what you need to do is to focus on building slowly, over time.
Honestly, if you look at my per-trade average profit, you won’t be impressed. But then, when you take a look at the longer term, you’ll see that my account has added up to over $4 million. That’s what successful trading is about: mounting small wins over time.
Never Trade Too Big
One good trade is unlikely to make your career, but one bad one can totally devastate you.
It can be tempting to chase huge, get-rich-quick trades by taking huge positions — but the trouble is that this is not reliable, and it can blow up your account fast.
Don’t take huge positions. Be conservative in your trades, and don’t let FOMO (fear of missing out) keep you in the trade too long. Know when to cut losses and when to declare your wins, even if you could earn more. You’ll never go broke with profits, even if they’re small.
When you don’t trade too big, you may never have those glorious home runs. But I’d rather be a slow-but-steady player in the game for a long time than a flash in the pan who fizzles out.
Trade scared. This approach is what will keep you safe when the market is in a place of turmoil or overturn.
Invest in Your Education
When you’re first starting out as a trader, growing your account shouldn’t be your first priority.
Nope, that’s not a typo. When you first start out as a trader, your first priority should be forging a strong foundation of knowledge. Before you increase your monetary balance, you’ve got to invest in your education.
Before you can perform any job with a degree of success, there’s a period of training and acclimation.
Trading is no different. You need the time to learn the ropes and get up to speed before you will really achieve anything. Give yourself this time — because if you don’t, the learning curve will be longer and harder and you’ll probably lose money along the way.
The Bottom Line
The 2008 financial crisis was an eye-opening event and a true turning point in the global economy.
Although it may seem like ancient history since it’s been a decade since it all went down, there are still many lessons that you can learn from this momentous event that can inform your career as a trader today and in the future.
You can never be too prepared as a trader. By educating yourself on past crises like this, you can make educated decisions about how to protect yourself — and even potentially profit — in the future.
— Tim Sykes
Editor, Penny Stock Millionaires