Episode 76: Preparing for a Market Crash
This week’s episode focuses on a sobering topic: Is the market headed for a crash?
With the market’s recent declines, many traders are bracing themselves for the worst. Here, hosts Tim Bohen and Stephen Johnson address what’s happening in the market and weigh in with their thoughts.
It’s always good for traders to be prepared for potential downturns. In the episode, you’ll learn some great tips for how to survive and keep trading during a market crash. And since this podcast lives to give, you’ll also be treated to Stephen’s soul-stirring singing rendition of Tom Petty’s hit song, “Free Fallin’.”
The Market is a Gauge of Sentiment
Here’s the thing. The market is deeply affected by the sentiment of traders. This means that if there’s a buzz in the air that the market is headed for a decline, it leads to selling, which leads to more selling, which can cause a market crash.
Because of this, sometimes it’s hard to discern if there’s an actual crash headed your way or if it’s just a temporary situation brought on by fear.
Preparing for a Market Crash: Survival Tips
In recent weeks, the market has seen some ugly days and bounces that haven’t recovered. While a crash isn’t definite at this point, it’s wise to think about your game plan for if the market does crash.
In the episode, Tim and Stephen share some of their best tips and considerations, including:
Remember, it’s temporary. What goes up must come down. In the stock market, ups and downs are natural. The market will always experience fluctuations. While it can be scary when it trends downward, remember: it’s only a matter of time before happy days are here again.
Consider your long-term plan. A market crash is a great time for traders to look at their long-term goals. Is trading really a long-term plan for you?
Tim talks about how he goes short on trading but his long-term retirement plan is real estate, because “people will always need a place to live.” Considering your long-term goals can be a good way to make the most of a crash.
There are always opportunities. The same volatility that can make people (mostly civilians) lose money can benefit others. Bankers and hedge funds, for instance, still tend to benefit from a crashing market. You can, too.
No matter what the market conditions, there are always opportunities for traders. You may need to change your tactics in a down market, though.
For instance, while Tim hasn’t been short selling much for the past two years, that may change in the near future.
Short selling isn’t always easy. While short selling can be a way to profit in a downward-trending market, it’s not always simple. You can get smoked on getting shares, and you can have trouble getting borrows. So it’s important to find a good niche with short selling.
Stephen talks about his shorting approach, which can be summed up in three words: “negative, negative, negative.” He also talks about the danger of getting lazy and the potential pitfalls you may experience as a result.
Consider higher-priced stocks. There’s a lot of fear in the penny stock market during crashes, so people take gains earlier and aren’t holding on as long.
On the other hand, higher-priced stocks naturally go down when the market does, so they may become more accessible to traders during a crash.
There will still be sector trends. During a crash, you need to dial in on the hot sectors. Why waste your time on things that can’t be predicted at all?
Stops are even more important than ever. Or as Tim says, “look for idiot stops.” He likes when a stock has a crystal clear exit point that is obvious to just about everyone. A trading plan is super important in times like these, and so is sticking to the plan!
Do your research. A market crash is not the time to get lazy about your research. If anything, it’s even more important than ever! Good fundamental and technical analysis are always a good idea, but they’re particularly important during a market crash.
Do you have something to ask Tim and Stephen? Visit the “submit your audio” portion of the website to ask away.
Thanks for tuning in to the SteadyTrade Podcast. Stay tuned for weekly episodes featuring the hottest topics for traders of all levels.
Did you love this episode? Be sure to leave an iTunes review!