How to invest during a market panic
Reading time: 22 minutes
At the beginning of 2020, nearly every investor in the world was caught off guard when stock markets plunged in their fastest ever fall on record during a market panic not seen since the 2008 financial recession. The coronavirus-led sell-off put an end to the eleven-year bull run in stock markets, sending some of them into bear market territory - creating fear among some but opportunity for others.
Knowing how to navigate these turbulent times is essential in protecting what you have but also finding an opportunity for portfolio growth. In this article, you will learn:
- How to short sell in a stock market panic
- How to build a diversified and balanced portfolio like a hedge fund
- How to identify defensive stocks in a financial panic
- Why hedging strategies are important to investors
- The rules of bargain hunting during a stock market crash
- A gold trading strategy to get started with
- How Admiral Markets UK Ltd can help you during a market panic
- And much, much more!
Six step guide in how to invest during a market panic
One of the most important steps in dealing with a market panic is to stay calm. No good decisions come from being emotional and rushing into things. Markets will naturally go up and down. Take a step back and think about your options or choose one of the six strategies below.
#1 Short selling in a stock market panic
Most traders and investors will be familiar with the conventional wisdom of 'buy low and sell high'. You buy shares in Company X at $200 and then sell it for $300 making a profit of $100 - minus any costs or commissions of course. However, in a stock market crash where everyone is selling, or cashing out, it may prove more useful to short sell a company and to go with the momentum.
So what does short selling involve? Firstly, it involves a trader borrowing the shares of a stock they do not own and then selling those shares on the open market. The aim is to repurchase those shares at a lower price. This type of transaction is usually reserved for hedged funds. However, with the advent of CFDs (Contracts for Difference), retail traders are able to speculate on the rise or fall of a financial instrument without owning the underlying asset.
Short selling example
During the 2020 stock market sell-off, governments placed restrictions on travel to and from certain countries. As there were fewer people travelling, airlines and travel companies took a major financial hit causing some investors to exit any long positions in these type of companies while attracting interest from short-sellers.
However, the market will react quicker than most traders do their research and analysis. Therefore, it may be best to find a company that already exhibits a weak stock price due to other fundamental reasons such as poor sales. When the market panics these stocks will then have a higher chance of falling even further.
For example, let's have a look at the price chart of German airline Deutsche Lufthansa AG (LHA):
Source: Admiral Markets MetaTrader 5, #LHA, Monthly - Data range: from 1 October 1994 to 18 March 2020, accessed on 18 March 2020 at 3:23 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The chart above shows the share price of the company from 1994 to early 2020. It's clear to see the share price was already falling from 2017, exhibiting weakness that could be compounded by any market panic or stock market crash. Indeed that did happen when the coronavirus-led sell-off gripped financial markets in early 2020, as the chart below shows.
Source: Admiral Markets MetaTrader 5, #LHA, Daily - Data range: from 26 October 2018 to 18 March 2020, accessed on 18 March 2020 at 3:24 pm GMT. Please note: Past performance is not a reliable indicator of future results.
From here, traders can then use technical analysis, technical trading indicators and price action patterns to help identify areas to 'sell high' and 'buy back at a lower price'. For example, on 4th March 2020, the daily price bar of Deutsche Lufthansa AG's share price formed a very popular, and well-known price action trading pattern called a 'shooting star candle' and is highlighted in the gold box on the chart below:
Source: Admiral Markets MetaTrader 5, #LHA, Daily - Data range: from 26 November 2019 to 18 March 2020, accessed on 18 March 2020 at 3:25 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The 'shooting star candle' formation is where buyers push the share price but cannot hold onto the gains, allowing sellers to take control and push the market back down with the open and closing price in the lower third of the candle. In this situation, traders could have placed an order to sell, if and when price from the open of the next day breaks below the low of the shooting star candle (€11.765). A stop-loss could have been placed at the high of the shooting star candle (€12.285) to exit the trade at a loss that is manageable.
Selling 100 CFDs would result in an approximate trade loss of EUR 52 (11.765 - 12.285 * 100), not including any commissions you have to pay for the trade. However, if the trader stayed in the trade and moved their stop loss to the high of every following seller bar, the trade would have been exited on 13 March 2020 at €9.572, resulting in a profit of approximately €219.30, not including any commissions or daily financing charges. To work out your risk parameters use the Admiral Markets Trading Calculator.
However, there are some risks to short selling as on any good news announcement the stock could push back up. There is also the possibility of governments banning short selling on stocks. During the coronavirus-led sell-off, Italy, France, Spain and other countries banned short selling on stocks. Therefore, having the right broker is essential as they can update you on any significant changes. For example, in the MetaTrader 5 trading platform provided by Admiral Markets, traders were notified in the Mailbox tab, as shown below:
A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the mailbox notification of the short-selling ban from some European governments.
Another advantage of using CFDs to short sell is the fact the product can also be used to hedge investments that investors do not want to sell. In fact, this was the initial purpose of CFDs when they were first created in the early 90s. Please keep in mind that CFDs are complex instruments and not suitable for beginners. Before making any investment decisions, you should consider whether you understand how CFDs work and whether you can afford to take the risk of losing your money.
One of the best ways to start trading CFDs is through a demo trading account where you can trade in a virtual trading environment to practice your skills. You can open a FREE demo trading account with Admiral Markets by clicking on the banner below:
#2 Hedging investments in a financial panic
Imagine you have a stock portfolio of big-name companies such as Apple, Tesla, Barclays and VW. You bought at good price levels and are happy at the dividends each of the company pays out. You don't want to sell everything but you can see the potential for the stock market to decline overall. What's the solution?
Many investors will attempt to hedge their exposure. This means taking a position in a market to offset the risk of future price movements. It's actually a technique used by large multinational companies who need to offset the cost of a rising or falling currency or commodity. To hedge a stock portfolio, investors have the option to short sell a stock market index.
A stock market index represents the value of a group of stocks from a particular country. For example, the S&P 500 stock market index represents the value of the largest 500 companies listed on the New York Stock Exchange The FTSE 100 stock market index represents the value of the largest 100 companies listed on the London Stock Exchange. Using CFDs, traders can short sell a stock market index and potentially profit from a falling market which could offset some losses in their stock portfolio.
With Admiral Markets traders can access 16 cash indices and 24 index futures covering markets all over the world, as shown below on the Admiral Markets Contract Specification page:
A screenshot of the Admiral Markets Contract Specification page showing a selection of the CFD Cash Indices available to trade on.
You can learn more about futures trading in the CFD vs Futures Trading article. To short sell a stock market index, traders first need to open the MetaTrader 5 or MetaTrader 4 trading platform provided by Admiral Markets. If you have not yet done this, start your free download here. Once this has been done, open the platform and follow these steps:
- Open the Market Watch window by selecting View from the menu at the top of the platform or by pressing Ctrl+M on your keyboard. This will open up a list of tradable symbols on the left side of your chart.
- Right-click on the Market Watch window and select Symbols or press Ctrl+U on your keyboard.
- This will then open the window shown below which details all the markets available for you to trade on. From here you can add a wide variety of stock market indices to your Market Watch window by selecting the relevant share or country and clicking Show Symbol.
A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the symbols windows and cash indices tab.
After clicking the OK button in the symbols window you can now view the different instruments in the Market Watch window. To view a price chart of an instrument in the Market Watch window, simply left-click on one of the symbols in the window and drag it onto the chart area. From here you can now open up a trading ticket:
- Right-click on the chart.
- Select Trading.
- Select New Order, or press F9 on your keyboard.
- A trading ticket will open for you to input your entry price, stop loss and take profit levels and your share trading size (volume).
A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing a trading ticket.
So far, we have covered some of the strategies available to short sell in a market panic and potentially profit from falling asset prices. However, falling asset prices can lead to another strategy of finding undervalued or low price stocks which are covered in the third strategy of how to invest in a market panic.
#3 Bargain hunting during market panic
In a stock market crash caused by a financial panic, it's easy for traders and investors to become fearful on what to do next. However, according to legendary investor Warren Buffett, you should "be fearful when others are greedy and be greedy when others are fearful". Just one month after the historic housing market crash in 2008 and the credit crunch which bankrupted the Lehman Brothers, Buffett - also known as the Oracle of Omaha - published an op-ed for the New York Times titled "Buy American. I am".
Even legendary hedge fund manager Ray Dalio of Bridgewater Associates echoed Buffett's words when speaking at the Harvard Kennedy School's Institute of Politics, stating: "It's when you're not scared you probably want to sell and when you are scared you probably want to buy".
However, even after Buffett's sage advice in 2008, stock markets plunged further before pushing back up. But long-term investors don't just look at stocks that are dirt cheap, they look for value. As Buffett explained in an interview with CNBC: "If you're buying a business, and that's what stocks are... you're gonna own it for 10 or 20 years," he said. "The real question is: 'Has the 10-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours?'"
How to find stocks in a market crash
Most of the time it's best for new investors to focus on companies they are already familiar with such as Apple, Microsoft and many others. However, keeping track of economic announcements and technical signals on all the stocks available to invest in is time consuming.
Fortunately, Admiral Markets users have access to the MetaTrader Supreme Edition plugin which allows you to access automated analytics and analyst research from global fintech leader Trading Central, directly from the MetaTrader platform provided by Admiral Markets.
For example, the screenshot below shows the Technical Insight Lookup page in the MetaTrader 5 Supreme Edition trading platform provided by Admiral Markets. After searching for 'Apple' stock it provides technical trading setups for short-term, intermediate and long-term moves.
A screenshot showing the MetaTrader 5 Supreme Edition platform provided by Admiral Markets and the Technical Insight Lookup tab for Apple shares.
Did you know that you can download the MetaTrader Supreme Edition completely free? Not only can you access advanced, actionable technical analysis on a wide variety of financial instruments but users also get access to advanced order functionality and package of advanced indicators, among others. Click on the banner below to start your free download:
Alternatively, watch the video below on how to install the MetaTrader Supreme Edition:
#4 Identify defensive stocks in a stock market panic
During a prolonged stock market panic, many investors tend to perform a sector rotation of their portfolio. This involves rebalancing a stock portfolio into sectors that typically perform better in such conditions. For example, if the stock market panic is due to the potential of an economic recession investors may choose to invest in defensive stocks.
So what is a defensive stock? The definition of a defensive stock is a company whose earnings and performance has a low correlation to the economy and will remain stable regardless of what the economy is doing. Defensive stocks tend to include companies from sectors such as consumer staples, utilities and health care. After all, no matter what is happening in the world people still need water, gas, electricity, cleaning products, health products, etc.
Research from Capital Group, shows that defensive stocks have fared better in market declines, as the image below shows:
Source: Capital Group
Some of the biggest consumer staple stocks include Procter & Gamble, Walmart, Costco, Colgate-Palmolive and many others. While users can trade and invest in these companies directly, there is also the option of using exchange-traded funds (ETFs) to gain sector exposure.
The Consumer Staples Select Sector SPDR Fund ETF (XLP) provides a representation of the consumer staples sector of the S&P 500 stock market index and provides exposure to companies from food and staples retailing, beverages, tobacco, household and personal products. The top three holdings in the fund as of 19 March 2020, include Procter & Gamble, Walmart and PepsiCo.
Users can find this instrument directly in the MetaTrader 5 trading platform provided by Admiral Markets, using the following steps:
- Open MetaTrader 5.
- Open the Market Watch window (Ctrl+M).
- Right-click and select Symbols.
- Search for 'consumer staples' as shown below:
A screenshot showing the Symbols window in the MetaTrader 5 trading platform provided by Admiral Markets.
#5 Diversify and consider gold in a market panic
Gold has historically been a popular market for traders and investors in times of economic uncertainty and market panic. This is because of its status as a 'safe-haven' asset due to the fact it was used as a form of currency in ancient times, among other reasons. In the 2008 financial recession, investors exited the stock market in favour of the gold market, as the chart below shows:
Source: Admiral Markets MetaTrader 5 Supreme Edition, Gold, Monthly - Data range: from 1 January 1992 to 21 March 2020, accessed on 21 March 2020 at 9:18 am GMT. - Please note: Past performance is not a reliable indicator of future results.
The yellow box in the chart above shows the price action of gold from the beginning of 2008 to the end of its bull run in late 2011. While the price of gold was already moving higher before the financial recession, the event triggered a further acceleration in its price. Typically, a market panic is triggered by an event that has caught everyone off-guard as most bigger players already react to any known-news events.
With Admiral Markets, there is a wide variety of Gold ETFs that investors can choose from as shown below when searching for 'gold' in the Admiral Markets Contract Specification page:
A screenshot of the Admiral Markets Contract Specification page, searching for 'gold'.
Did you know that with the Admiral Markets Invest.MT5 account you can invest in stocks and ETFs from 15 of the largest stock exchanges in the world? Not only can you access Gold ETFs and other stocks and ETFs, but there are also other benefits such as:
- The ability to open an account with just €1 minimum deposit and invest from just $0.01 per share with minimum transaction fees of just $1 on US stocks.
- Receive free real-time market data, with no delays, at no extra cost.
- Create a stream of passive income by collecting dividend payouts.
- Use the world-renowned MetaTrader 5 multi-asset class trading platform.
You can get started right now by clicking the banner below and enjoying all of the features above and more!
Alternatively, you may be interested in trading safe-haven asset classes like gold to capitalise on short-term volatility. If so, then read on!
#6 Actively trade safe-haven asset classes in a market panic
During a market panic, or stock market crash, there tends to be heightened volatility as more individuals are forced into the market to exit investments or rebalance portfolios. Some traders attempt to capitalise on this volatility by actively trading safe-haven asset classes. Below is an example of a possible trading strategy on Gold CFDs which can be traded commission-free with Admiral Markets.
Gold CFD trading strategy
The MACD and moving averages are two popular trading indicators that help to identify the short-term and long-term trend of the market. The MACD also provides several different types of trading signals. Here is what both of the indicators look like on the one-hour chart of Gold:
Source: Admiral Markets MetaTrader 5 Supreme Edition, Gold, H1 - Data range: from 28 February 2020 to 21 March 2020, accessed on 21 March 2020 at 3:28 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
The above hourly price chart of Gold can seem overwhelming to beginner traders. This is why a strategy is important when trading as it helps to streamline the process of information to make more effective trading decisions. Before we look at the rules, you can add on the moving average and MACD indicators by following these steps:
- Open the MetaTrader platform provided by Admiral Markets.
- From the top menu, select Insert->Indicators->Trend->Moving Average. The chart shows the 50-period exponential moving average in red.
- Then select Insert->Indicators->Oscillators->MACD. This is shown in the lower pane in the chart above.
A screenshot showing how to add the MACD indicator in the MetaTrader 5 trading platform provided by Admiral Markets.
Now let's identify some rules on how to use these indicators.
- Long Rule 1: Go long when the price is above the 50-period exponential moving average (red line) and...
- Long Rule 2: MACD crosses above the zero line.
- Short Rule 1: Go short when the price is below the 50-period exponential moving average (red line) and…
- Short Rule 2: MACD crosses below the zero line.
Both the long and short rules are using the moving average indicator as a trend directional bias, with the MACD indicator as a way to time a shift from one side of the market to the other (buyers to sellers and sellers to buyers).
The yellow boxes in the chart below show some but not all of the instances where the long and short rules have been met. Some setups did continue to go in the direction of the trade and others did not. It is inevitable to have losing trades when the market changes direction or market condition. This is why using stop losses and proper risk management techniques are important.
Source: Admiral Markets MetaTrader 5 Supreme Edition, Gold, H1 - Data range: from 28 February 2020 to 21 March 2020, accessed on 21 March 2020 at 4:28 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
Traders can further refine this by looking at price action trading strategies to help identify entry, stop loss and target levels, as well as experiment with different trading indicators.
Why trade with Admiral Markets?
- Trade with a well-established, regulated company which includes regulation from the UK's Financial Conduct Authority.
- Benefit from a negative balance protection policy, to protect you from adverse movements in the market.
- Access the fastest and most popular online trading platform called MetaTrader which you can use on PC, Mac, Web, Android and iOS operating systems and is provided for free by Admiral Markets UK Ltd.
- Open an Invest.MT5 investing account to buy shares and ETFs from 15 of the largest stock exchanges in the world.
- Open an Admiral.Markets or Trade.MT5 trading account to trade via CFDs (Contracts for Difference) in order to go long and short a market to potentially profit from rising and falling markets.
- Gain free access to the Trading Central indicator through the feature-rich MetaTrader Supreme Edition provided by Admiral Markets.
Get started today by opening a free demo trading account so you can trade in a risk-free, virtual trading environment until you are ready to go live!
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.