Education Resource

Trading Disasters

Master Instructor Blog

This week the U.S. announced it had definitive proof of chemical warfare by the Syrian regime, and that it planned to do something about it. The U.S. equities markets had their worst day in months, while oil and gold gained.

The first sentence of the preceding paragraph is news; the second isn’t because that is what inevitably happens in the face of a natural or man-made disaster. The markets hate uncertainty and surprise, and traders run for the sidelines or for the “safe harbor” of gold (as well as oil in this case, since Syria is in the Middle East).

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Is there a smart way to trade on news of a disaster? (A second, moral question is “should you?” Sam Seiden answered that when, after describing the gains his strategy had produced after the tsunami and nuclear emergency in Japan, he advised that anybody who had similar gains should consider donating all or most of the profits to charities helping Japan.)

The problem is that you don’t, by definition, know when a disaster is going to occur, and by the time you can react the market may have already made its biggest move. (The day after the Syria news, U.S. markets had a slight gain.) So you might end up shorting at the worst possible time—just when price is about to head back up. (Back to Sam Seiden and the Japanese tsunami: Sam told the Wall Street Journal the Nikkei was oversold when most analysts thought it would decline further, and he turned out to be the one who was right.)

However, there are a couple of things that can help you make money, or at least limit your losses, when that unpredictable disaster does happen. First, zoom out on your charts and look for historical supply zones. You may have to go back a couple of years if the market has taken a really big drop. But eventually you’ll find a place where price tested lows, flattened, and turned around. There are still unfilled orders at that level so it’s a place to consider placing your order to go long, not short—with appropriate stops in place in case you are wrong.

And second, disasters are one of the reasons we ALWAYS put stops on our trades at Online Trading Academy. You can’t predict when the worst may happen, but you can protect yourself so you lose small, not big.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.