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Trading After A Stock Market Crash

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  • Trading After A Stock Market Crash

    When a stock market has crashed, prices of stocks would have gone down a lot more from their highest prices. It is not uncommon to see prices pulling back some 40 to 50% of whatever they have gained within a very short period of time although it had taken many months and even years for the prices to move upwards to their highest prices.

    Often, when the stock market has crashed, traders who are technical in nature, or traders who have relied on technical analysis for their timing of their entries and exits, would become much more anxious about the accuracy of their timing indicators, especially if they had not been successful in identifying their exits before the market crash. After all, if their technical timing indicators had been good, they would have forecasted or identified the on-coming crash before it happened. If their timing devices were not successful in identifying the crash signal, it is easy to understand why their faith in their timing indicators would be affected and diminished.

    When this happens, some technical traders then revert to the use of fundamental analysis to scout for trading opportunities. I often hear the question asked: " What fundamental ratio can I use to pick up stocks that would rebound quickly after a crash?"

    Whenever I hear this question, I would be reminded of the real story of a professor of finance who lectured in a prestigious university in investment and portfolio management. With his many years of experience teaching in the university, he proceeded to find some stocks for his personal investment after a stock market crash. As a proponent of value investing, he had read all the books packed with solid data that proved stocks with low PE ratios( Price-earnings ) ratios would outperform the glamour stocks irrespective of the market condition. It did not matter whether the market was bullish or bearish.
    But the stocks that he bought with low PE's after the market crashed, continued to go further down. To his amazement, these stocks proved to be turkeys.

    After interviewing some practising money managers and professional stock traders, he found that what they did, did not really resemble what he had believed to be value investing. In contrast to the stocks with low PE's that he had selected after the crash and became turkeys, these professional money managers and traders had selected great companies that had stumbled during the crash, and these were the stars that exploded in price on the rebound.

    In the flight to quality stocks after a market crash, you can select great stocks with good fundamentals that have stumbled in price and have been driven low during the market crash, and then use your technical timing indicators to identify the breakout signal to trade these stocks.

    In that way, you can use both fundamental and technical analysis to select some great stocks that have the best chance of rebounding strongly when the correction and consolidation is over, and emerge a winner in trading in the aftermath of a market crash.

    If you need help in identifying the breakout points in technical stock trading, visit [http://www.poolofwisdom.com] for free information on capturing those explosive moves for gigantic gains in the stock markets.


    Article Source: http://EzineArticles.com/490775
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