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At a loss when encountering a black swan event? The key is to do these points we

Published: Jun 29, 2024
Updated: Jun 29, 2024

In 2020, after the COVID-19 pandemic, this super "black swan" event, the financial market also frequently witnessed black swan incidents, such as the U.S. stock market circuit breakers and the collapse of crude oil prices. Even to this day, influenced by the long-term impact of the pandemic, the financial market still harbors many potential crises. This perfectly echoes Dickens' words: It was the best of times, it was the worst of times.

So, how should we ordinary retail investors respond if we encounter a black swan event again?

Manage Your Positions Well

In fact, uncertainty in the trading market is very common. Once a black swan event occurs, the general trend is likely to reverse directly. It is normal for the market to be advancing vigorously one second and then to plummet the next. Therefore, we should manage the positions in our hands so as to ensure that we do not suffer significant losses.

So, we should first check if we have any open positions. If we do, we should immediately judge whether the direction and market trend are consistent. If they are not, it is best to prepare for hedging or exiting to reduce risks. If we do not have any open positions, then we should observe the subsequent market developments, because even black swan events may hide great profit opportunities. The so-called greatest crisis is also the best opportunity for a turnaround. You might become the biggest winner in a black swan event.

For example, there was a time when WTI crude oil prices went directly to negative, causing huge losses for a large number of traders. However, some traders made profits by trading in the opposite direction. Although it was a super black swan event, it was still possible to make profits if you grasped the opportunity.

Diversification is a Good Choice

However, trading in the opposite direction has high requirements for the trader's capital, mentality, and skills. Therefore, when facing black swan events, most of us can only passively defend, and diversification is a good choice. When trading, you can lay out some positions that are relatively good for the future market, such as some thematic stocks, or make some moves in gold, which has value preservation.

But just because you have done this, it does not mean that your capital is completely safe. You still need to consider the sentiment of traders and market expectations. For example, during the period when the U.S. stock market had a circuit breaker, the stock market plummeted, and gold also fell. This was because the market's pessimistic sentiment further spread, and traders did not have high expectations for the future. They all wanted to keep the money in their hands, so they started to sell gold. In this situation, the phenomenon of gold and the stock market falling together occurred. Therefore, do not think that just because you have diversified your investments, you can rest easy.Do Not Be Obsessed with Trading Experience

When you have been trading for a long time and have developed your own set of theories, you will habitually use these theories to think and then carry out trading operations. For example, during the sharp decline of WTI crude oil, many traders believed it was impossible for the price to fall to a negative value. However, due to changes in the rules, negative oil prices were allowed, resulting in a significant loss for a large number of traders.

The negative oil price incident tells us that in the face of black swan events, our trading experience and skills are essentially useless. Large market trends are unpredictable, and volatile movements are very common. At such times, if you stick to technical indicators like K-line and MACD, in the short-term large volatility market, technical analysis is almost impossible to be useful. You might have just finished analyzing and prepared to enter the market to go long, but then market news comes, and the market starts to fluctuate again, making your previous analysis useless.

Therefore, in the face of black swan events, we should not be so superstitious about trading indicators. We should adapt to the situation and make decisions based on the overall market trend.

Summary

Black swan events are very difficult to predict and unusual, often causing a chain of negative reactions in the market or even subversion. Even if such events are very rare, they can turn your profits into losses if they occur once. So, we should be cautious about black swan events, but we don't need to panic too much. After all, there may be great opportunities behind black swan events. If you can seize the one-way market, you still have the opportunity to make a profit against the trend.

What we need to do is to manage our own orders, adapt to the situation, but more importantly, to plan ahead. Don't put all your eggs in one basket and do your best to minimize the impact of black swan events on yourself.

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