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05.02.2020

Panic at the market! How to turn fear into money

We will remember January 2020 as an extremely tense and frightening time. It started with missile attacks and ended with coronavirus pandemic, which shocked the markets big time. Let’s see how to ignore the panic and make money when everyone - including investors - are scared like babies in a thunderstorm. 

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Warren Buffett once said: "Be fearful when others are greedy and greedy when others are fearful." Now, when the whole world is discussing a new coronavirus pandemic and buying medical masks, it’s just the right time to remember what that’s supposed to mean for traders.

We are no doctors to recommend what people should do with their health, but we can assess the impact of panic on the markets and figure out what investors should do.

Hack your basic instincts

Scary events always move the markets and force people to make impulsive decisions. That’s natural - people are ruled by emotions, but if you are a trader, you need to learn how to keep calm even if the rest of the world is going crazy. 

For example, when things get hectic, scared traders sell-off, and the “strong money” enters the market and takes prices higher. Investors who stay rational over such events tend to get handsome profits; others lose money and nerve. 

We don’t need to go far in search of an example. 

Brexit news created a tremendous market fear. You’d think it’s only relevant for British economy, but apparently it made the US market stormy, too. The S&P 500 had its largest one-day loss in several months. At the same time, one of the leading Wall Street strategists reported that hundreds of billions of dollars of stocks will be in forced liquidation over the upcoming days. The financial media panicked as the market fell by over 5% in two days.

This fear created a sell signal for scared investors and a buy signal for the smarter ones because two days later, prices rose significantly higher. 

When you learn to ignore the voice in your head that tells you to react NOW to secure your money, you are on the winning side. 

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Get the logic of fear

Behavioral research proved that people overestimate risks when it comes to something fearful. 

For example, the research carried during the outbreak of the SARS (Severe Acute Respiratory Syndrome) in 2002 showed that 23% of respondents feared they were likely to become infected with SARS. In fact, about 8,500 people caught in and less than 100 died - compare that with 35.5 million illnesses and 34,200 deaths during the 2018–2019 influenza season. 

This means the SARS outbreak could directly affect relatively few people, yet still heavily influence an interconnected global economy. When the coronavirus pandemic stroke, it put air transportation, world trade (especially ALIBABA), tourism, and many other things at risk. Future fears focused on the decline in Chinese GDP that may eventually affect the whole world. 

At this standpoint, a smart trader would consider three things: the real pandemic stats, the previous historical lessons, and the upcoming news. If the virus spreads and causes new deaths, risk aversion will continue to dominate the markets If the vaccine is found soon, the risks will lower, and markets would get back to normal - because they are not contaminated by the virus, they are contaminated with panic.

Remember about cycles 

The markets do move in cycles, and (almost) everything has already happened before. We had the Great Depression, the energy crisis of the 1970s, and Black Monday of 1987. We had deadly diseases, missile attacks, geopolitical disasters, and acts of terror. We’ve been through a lot of things, and we must look back to see what the historical lessons can teach us. Scenery changes, but not humanity. 

Panic creates great trading opportunities for traders who know when to buy and when to sell. And this same behavior has occurred over and over again since the dawn of time and will likely do so for years to come. Just remember that danger always looks bigger through the eyes of fear.

Don’t have fear, trade fear.

Trade now

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