Harvesting Profits In All Financial Market Seasons: Corona Virus Reaction Example
“It is down by just 11.3%! That’s nothing compared to what we had in 2008 crash. That was more like 43%. There is nothing to worry about. It is just an overreaction. It always comes back and we will be on our way to make money on the bull run.” — A fellow trader tried to calm his own nerves and those of around him after seeing Corona Virus market meltdown.
But then is it true that markets always ultimately become bullish? If so, how long shall traders wait for them to become bullish? Are corrections, crashes and black swan events not part of the game? If a market goes up it should surely come down too right? Are they not seasons of markets? If yes then what makes a trader a “seasoned” trader? I guess the answer is: the one who has seen and has proven ability to trade all market seasons.
Markets have these seasons: (Refer the S&P 500 chart below)
- Bull Cycle (Summer) — Green Arrows
- Transition Between Bull/Bear and Vice Versa i.e. Consolidation -Blue Arrows
- Minor Corrections (Spring/Fall) — Yellow Arrows
- Bear Cycle (Winter) — Red Arrows
Let’s look at S&P 500 index between 1991 and 2020. For nearly 9 years between 2009 and 2018 it had one the longest Bull runs. It was unstoppable without any major corrections like in 2000 and 2007.
Any new trader who bought into this bull phase obviously made a good chunk of profits. All they had to do was buy, hold and take profits on stocks or index fund. Good for them. That was the Summer in markets. They probably did not experience the Winters of 2000 and 2007. And that is not good for them in the long run!
Springs, Falls and Winters are the ones where their capabilities to profitably trade markets are tested. Have a look at a couple of recent Falls in 2016 and 2019. Markets took a little breather. But at those times, there was again blood on streets with all sorts of panic. Traders who only used Trend Following Strategies (e.g. Buy Only and Hold) so far and thought of themselves as Gods were killed mercilessly. The Trend Following Strategies that worked for them for 9 years were not suitable for these. Traders needed a different set of tools to harvest profits out of markets. They had to employ Counter Trend Strategies (e.g. Sell, Reverse and Hold).
Astonishingly, nearly 90% of retail traders & investors are still under the impression that money could only be made in a Bull market. Nothing could be further than the truth. Contrary to the common belief Counter Trend Strategies can be as profitable as Trend Following Strategies and arguably even more. The amount of risk is always nearly the same as long as traders know the difference between “following counter trend” and “calling tops and bottoms”. These strategies are nothing different to Trend Following Strategies. They are also Trend Following Strategies just in the opposite direction and probably for a shorter duration.
Historically the S&P 500 has fallen much more than what it has done so far due to Corona Virus reaction. So far it looks like a minor correction but it may very well turn out to be a new Winter. Only time will tell. However one thing is for sure that seasoned traders are already in the game.
Let’s see what advance indications S&P 500 gave us of this downfall:
- Between 15th and 17th of Feb, 2020 S&P 500 created a divergence on the daily chart. This usually indicates a reversal in the trend. Traders take their profits or cut their positions at such levels.
- 3218 Price level had previous weak support because of a bear candle and not much movement upwards from it. The market came to test it, showed an initial reaction on 4 Hour chart and then broke it. Next target was 3066 price level.
- Similar to 3218, 3066 price level was also weak. On 4H time frame, the break out could easily be confirmed. The next target was 2882.
- Level 2882 is a good demand zone because of Bull candles and this is where the last bull run started from. So market respected that.
The S&P 500 gave all great subtle indications. The majority never saw them amidst fear and panic. The ones who knew what to do were the ones who harvested profits. These are seasoned traders.
Disclaimer: This article is for educational and information purposes only and not investment advice. It does not and is not intended to constitute investment advice or an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. It is not intended to downplay the importance of public healthcare Corona Virus outbreak. Please be very careful and take extreme care of yourself and your loved ones. Take all precautions to stop it from spreading and stay healthy.
Vikas Aggarwal is a Forex Technical Analyst, Trader and Mentor. He shares his trading ideas and knowledge on TradingView and YouTube.
