If you have lived through economic crises in the past, you will know that disaster can be the mother of all opportunity. Never has this maxim been truer than that is currently. As the world economy reels from the impact of the coronavirus pandemic, stock markets are more volatile than they have been in a long time. For more information on the best ways to make money during times of economic instability, check out FXTM trading strategies section. Meanwhile, here are our seven sage tips to help you to both protect your investments and turn a profit through trading during the coronavirus pandemic.
1. Widen Your Stop-Loss Limits
A good piece of advice when prices are prone to large swings is to widen your stop loss margins. Stop-loss is a tool that allows traders to automatically leave a position when a price drops below a certain level. This level can be set in advance to prevent a trader from losing too much should a stock suddenly crash.
At the moment, we are seeing large fluctuations in prices on a weekly and daily basis. Stock prices seem to be routinely plummeting before rising back to their original levels in a very short space of time. If you set your stop loss too conservatively, you could leave your position prematurely before stocks shoot up again.
2. Use Orders
Limit orders are an especially useful tool when stock prices are subject to increased volatility. They allow a trader to set a price at which a certain stock will be bought when it falls to a certain price. If you are good at predicting these falls, orders are a great way to buy into a position at the time when stock prices are at their lowest before they recover leaving you with a healthy return on your investment.
3. Be Cautious with Leverage
Trading with leverage is a risky business at the best of times. Although it provides the savvy trader with an opportunity to maximize their profits, buying into a position that is beyond your financial means can leave you overstretched. If a stock suddenly crashes, you could end up losing not only your original investment but also the amount that you have leveraged from your broker to buy into the position.
4. Trade Short-Term
When stock prices are as volatile as they are now, it is a good idea to narrow the timeframe that guides your investment strategy. Stocks can crash in a matter of minutes on the smallest negative rumor. If this happens when you are unable to access the market (when you are asleep or away from your phone or computer), you could end up losing a large amount of money. It is wise to short your position at the end of every trading day in the current climate.
5. Reduce Equity Risk
Diversifying your investment portfolio has never been more important than it is in the current crisis. Most financial experts will advise you to avoid having more than 3-5% of your account tied up in any one asset. With prices subject to huge swings at the moment, and nobody can really say with much certainty what prices in different asset classes are going to do over from day to day. Spreading your investment over a number of different stocks will help to insulate you from this risk.
6. Be Open-Minded
At times like these, the importance of keeping your ear to the ground for the latest news that may impact on stock prices cannot be understated. The smallest piece of political or business news can have a massive effect on the market. Look out for any indication that a country is beginning to fair better or worse in its fight against the coronavirus. If you can apply this information to your trading strategy faster than others, you could be on to a real winner.
While the coronavirus pandemic is proving to be an unmitigated tragedy when it comes to health and employment, it is fair to say the situation has somewhat of a silver lining for traders who are willing to make moves to capitalize. By following the tips above, you can both protect yourself against market volatility and give yourself an edge when it comes to turning a profit.