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How To Trade After A Stock Market Crash

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  • How To Trade After A Stock Market Crash

    Trading in the stock markets of the world does not equate to just trading during bullish times. There are times when after a prolonged period of bullishness, the market has to turn down. After periods of exuberance, when it comes down, it can come down with much ferocity...it can drop fast, almost like in a free fall, giving rise to perceptions of a crash. When the market crashes, many traders are bewildered, because they are not familiar with a crash, or might have just started to trade. So for these traders, what should they do?

    When stock market crashes and burn, the first thing that most experienced traders do is to seek refuge and safety. In the exuberance of a buoyant market, traders and investors do skip quality for the benefit of fast capital gains. In the process, they go for all sorts of stocks and shares, even those that do not meet stringent selection criteria of bringing in fundamental value over the long run. As long as they appear cheap, poorer quality stocks are purchased with the hope of rising further in prices, which they do during a bullish market. BUt once the market has crashed, it is the fundamental quality of the stock that is important to shore up its falling price.

    Once a stock market crashes, there is a flight back to quality stocks.

    Experienced and savvy traders exchange poor quality stocks with good quality stocks or blue chips. These established stocks possess good earnings, and generate good dividends and are the first to rebound when the market stabilises after a crash.

    There is a bath tap analogy. Like water being let into a bath tub when you are taking a bath and water is being filled into the tub, the dirt and scum rises to the top, with better water quality at the lower portions of the bath tub. So during a bullish market, it is the lesser quality stocks and shares that rises up first, with the blue chips the last to move upwards in price. But once the stopper is unplugged, it is the better quality water that flows out from the bottom, leaving the scum and dirt at the upper portions being the last to flow out.

    Similarly, during a crash, just like the water that gushes out of a bath with the stopper unplugged, the experienced traders and smart money quietly sell out on the better quality stocks earlier on, leaving the uninformed traders holding on to stocks of poorer quality when the market crashes.

    It is those experienced traders who have sold out the better quality stocks earlier before the full aftermath of the crash is seen and felt that are now in the best position to move back into the better quality stocks during a crash, and at lower prices.

    During and after a market crash, go for quality and you will be well rewarded many months down the road. Adopt trading techniques that are proven to help you trade during a bearish market and you will do well.


    Article Source: http://EzineArticles.com/471561
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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.


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