6 INEVITABLE Stock Market Downturns
In the world of stock trading, and crypto trading, volatility is as much a part of the landscape.
Whether you’re a day trader or a long-term investor you’re bound to undergo different degrees of stock market downturns, drops and crashes.
And each level of downturn has its own set of characteristics, challenges, and strategies for recovery.
Let’s dive into the nuances of market downturns, so you can navigate these stormy waters with confidence and savvy.
DOWNTURN #1: Down -2%: A Ripple of Volatility
Think of a -2% drop in the stock market as your morning coffee spilling over a bit—it’s unpleasant but hardly the end of the world.
This level of decline is typically seen as a blip of volatility, a common occurrence in the stock markets that often corrects itself in the short term.
DOWNTURN #2: Down -5%: The Pullback Perspective
When the market drops by 5%, it’s is often referred to as a pullback and, while it might cause a bit of concern.
However, if you look at the bigger time frame, you’ll see it might not signify a long-term trend.
DOWNTURN #3: Down -10%: Entering Correction Territory
A 10% drop is a clear signal that the market is in a correction phase.
This is where the uptrend will come to a temporary halt and the market will drop and correct itself.
You’ll see moving averages will cross down and the medium term trend will be showing downside.
You’ll also most likely look for shorts (sells) and take advantage of the correction.
DOWNTURN #4: Down -20%: The Bear Market Looms
Now we’re in the territory of the bear market.
This is generally characterized by a 20% or more drop.
It might be time to look into more defensive stocks or sectors, such as utilities or consumer staples, which tend to be less affected by economic downturns.
DOWNTURN #5: Down -50%: The Market Crash Crisis
A 50% plunge is the equivalent of a financial earthquake, causing widespread panic and uncertainty.
It’s quite rare, but when it happens, it’s all hands on deck.
We saw this in the financial crisis.
We saw this during the tech bubble.
We saw this with the oil crisis.
Silver Linings:
Even in the darkest times, opportunities can be found.
And whenever we’ve had a crash with world markets, they have turned up, made a come-back and moved to all time highs.
DOWNTURN #6: Prolonged downside: The Depression
This one I don’t have a number for you.
Unlike recessions, which are typically shorter and less severe, depressions are rare and can last for several years, causing long-term damage to a country’s economic health.
The most famous example is the Great Depression of the 1930s, which started with the stock market crash in 1929 and lasted for about a decade in most countries.
During this period, unemployment rates soared, reaching as high as 25% in the United States, while industrial production, prices, and incomes plummeted.
Conclusion:
Steady as She Goes
As I like to say.
It’s important to know that the downtrends, downturns and downside will come.
We need to be clued up and prepare for these situations.
That way we’ll take advantage as traders of what to do.
With the right approach, you can not only survive these downturns but emerge stronger and thrive profitably on the other side.
Trade well, live free.
Timon Rossolimos
Founder, MATI Trader
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Timon Rossolimos
Founder, MATI Trader
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