Stock markets have been really volatile this year. We have seen some extraordinary moves, which have taken them through a roller-coaster, sending stock prices thousands of points down and up again, as we have covered in our forecast section. This has raised the question, whether trading stock markets is gambling or if it can be a profitable business, like all other businesses, which include a certain amount of risk.
Extraordinary Times Leading to Extraordinary Moves in All Markets
It’s true that the volatility has been extraordinary in sock markets this year. The German index Dax crashed around 5,500 points lower in late February and early March, after the coronavirus pandemic broke out in Europe, which hurt the sentiment in financial markets, sending risk assets such as stock markets down. If you were long before that move without a stop, chances are that you might have lost your account, unless you have large amount of funds, or trade very small sizes. If you tried to trade that crash and went short near the bottom, then you should have lost your account too. That looks a bit like gambling in stock markets.
Some analysts are expecting another crash in stocks in the coming months
But the situation was similar everywhere. Many things have happened this year all over the globe. The whole world is changing fast, politics and economics including, which has been causing mayhem in all markets. Commodities crashed as well in spring, with US WTI crude Oil tanking to $ -40, which is much worse. So, if you were in a buy trade in stocks, then imagine if you were long in crude Oil. Currencies and cryptocurrencies also went through a roller-coaster. So, it’s not anything wrong with stock markets, especially now that they have calmed somehow.
Crashes Don’t Happen Too Often
The coronavirus crash was really massive in spring this year and it happened across all markets, since the real economy was heavily affected too. But, that sort of crash doesn’t happen all the time, in fact, it happens very rarely, once or twice every decade. In early 2000s Dax lost around 6,000 points, but that took several years. In 2008 the price fell several thousand of points, which took a little more than a year.
The Greek debt crisis in 2011 was also a major drag for risk sentiment everywhere, sending stock markets down in a quick move. The other cases when stocks went through a major retreat were when central banks started withdrawing liquidity in 2016 after spending tons of cash for a decade, following the 2008 financial crisis which sent charts down on the ceiling and in 2018, after Donald Trump imposed trade tariffs on China, opening a trade war. But, none of them were as massive and quick at the same time as the crash that took place early this year. So, these sort of crashes don’t happen too often. If you get caught on one of them on the wrong side and you lose your account, it is probably a lack of trading skills.
How to Avoid Gambling in Stock Markets
It is established that participating in trading in financial markets involves a certain amount of risk. You can’t predict all the events which will take place anywhere in the world, with an effect on stock markets. But, we can prepare in order to avoid losing the entire account in a crash like the one we saw this year. There are many techniques and trade strategies that can help traders avoid such scenarios, even if they might take a hit, which is normal when trading forex. Some of these ideas you can find in our forex forecasts for the coming months.
Trading Long Term Charts
Trading looks very complicated if you look at smaller time-frame charts. There is a lot of noise, with the price moving up and down without any clear direction or indicators to tell when the reversal is coming. But, if you zoom out and look at the bigger picture everything looks much clearer and trading becomes much easier suddenly. If you look at the smaller period charts, such as the hourly or H4 charts, they look confusing and even the candlesticks are not clear, which don’t signal anything, since they are great indicators for showing reversals in other markets. There are also many gaps from day to day or over the weekend, which are misleading, especially for traders who like to trade gaps.
Despite the volatility, the pressure has been on the upside on the monthly chart
So, for a number of traders, trading smaller time-frame charts in stock markets might look like gambling, since a lot of trading rules don’t apply. But, if you look at the daily charts or higher, then the picture looks a lot less confusing. Looking at the monthly Dax chart the trend is pretty clear. Buyers keep pushing higher, with lows getting higher as well during pullbacks for the reasons we mentioned above, apart from early this year.
Being on the Buy Long/Side
Stock markets have a habit of coming back from the abyss and pushing higher all the time. They do go through some major retreats, which look brutal on the smaller charts, as well as being devastating to some traders, but eventually they reverse higher after such periods and the long term bullish trend resumes again.
Stock markets have been bullish forever and that understandable, since inflation keeps increasing, which increases the price of everything over the decades. This means that the way to go for stock markets is bullish and the place to be for traders is long/buy. All we have to do is wait for a decent retrace and then by certain stocks or indices, leaving some decent room as well for the price to wiggle for some time, before it reverses.
Employing Moving Averages as Support and Reversal Indicators
Stock markets are very trendy, as we mentioned above and they trend higher all the time. But, they don’t go up in a straight line, or don’t follow a straight trendline, since trading happens in real life, according to the sentiment in financial markets and the sentiment doesn’t care for geometry. So, don’t employ indicators such as trendlines, which need everything to be exactly to the pip. Rather, use indicators which are more flexible and have a history of working well as support and resistance, indicating reversing levels.
If you used MAs as buying indicators for S&P, you would only be wrong once since 2010
Moving averages are great indicators to use as support and resistance; in the case of stock markets as support. They have supporting major indices for as long as the trend has been bullish, as we saw in the case of Dax. In S&P500 this is even more visible. When the price was trending down in the 2000s, they were acting as resistance. Since the beginning of the last decade, when the trend reversed they turned into support and have been doing that job very well. The higher time-frame moving averages such as the 200 SMA (purple) have provided support when the pullbacks have been bigger, while the smaller ones such as the 20 SMA (grey) when the trend picked up pace. Trading smaller sizes when the volatility increases is another obvious technique. So, while there is a lot of volatility in stock markets at times, it doesn’t have to be a gambling if you trade them the right way.
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