Trading 101: How to Trade Absolute Market Chaos

01:40 10/23/2018

Major index futures plunged.

The Dow Jones fell another 400 points on Tuesday. The NASDAQ fell 75. The S&P 500 was down as much as 35 points on the day. Investors panicked and sold.

“Indeed, a wall of worry has morphed into [a] towering wall of pain as extremely fragile circumstance across the capital markets continues to undermine investor confidence,” said Stephen Innes, head of trading at Oanda Corporation, as quoted by MarketWatch.

“Markets continue to tremble but with traders suffering a severe case of the cold sweats as geopolitical risk runneth over, the unambiguous bias toward safe havens suggest the street is expecting this rout to deepen. In the absence of any tier one US economic to tether market sentiment, the bears are uncaged, and a bull is on the menu!”

All thanks to a mountain of worry.

Some believe the Federal Reserve made a mistake raising rates, which could make borrowing much more expensive. Mid-term election jitters can be blamed. The looming end of quantitative easing is ending in Europe. Earnings growth may be slowing.

And then of course, the trade war between China and the U.S. hasn’t been well received.

Interesting to note, this is all happening in the worst month of the year, mind you.

As bad as things may seem in the markets, there is good news.

“The tax reduction helped produce an unprecedented 25% first half surge in earnings, underpinning stock prices in what is normally a difficult environment for investors. Notwithstanding the stock market’s recent correction, equities typically generate outsized returns in the midterm quarter and the one immediately thereafter. This suggests that stocks will ultimately rebound,” wrote Joseph LaVorgna, chief economist Americas at Natixis, as quoted by MarketWatch.

We must also remember that markets are resilient.

The last thing you ever want to do – especially now – is panic.

Any time the market goes haywire, remember these key rules from Warren Buffett.

Rule No. 1 -- Have Cash on Hand

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” Buffett says.

Rule No. 2 -- Don’t Follow the Herd says Buffett

One of the key reasons that many investors under-perform in the market is because they move in and out of assets at the wrong time. Therefore, an investor sees everyone else making money from rising markets. This is when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, that investor sells too. According to Buffett, they are influenced by the herd mentality, which can be extremely damaging to a trading portfolio.

Rule No. 3 -- Be in a Strong Position to Capitalize

Furthermore, with cash on hand, Buffett has the financial flexibility to take advantage of any opportunity that presents itself. As the billionaire often points out, keeping some cash on hand allows you to benefit from corrections without having to sell other investments from your portfolio.

Too Much Fear: How the Pros are Trading It

While markets are still falling, some traders are buying stocks and indexes that are down far too much, far too fast. The last time the Dow Jones was this overbought on RSI, MACD and Williams’ %R was in April 2018 before it exploded from 23,500 to all-time highs.

Some are also buying:

• ProShares Short VIX Short-term Futures ETF (SVXY)

• VelocityShares Daily Inverse VIX Medium Term ETN (ZIV)

The fear appears to be greatly overdone.

This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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