Some say the next financial crisis is just around the corner. What does it mean for you as a trader? That a lot of companies, that can be found on the IQ Option platform, will lose in price. Knowing how to trade a depreciating stock is a skill worth learning. Even without a financial crisis ravaging the market there are always good companies that find itself in less than favorable market conditions and start to lose in price.
Most traders know that you are not supposed to catch a falling knife, e.g. buy a depreciating stock. They say don’t go against the trend for a reason. When you buy a falling stock, you don’t know when the reversal will actually happen. Chances are, you will lose more during the initial fall than gain later when the stock is back on track.
Jeff Clark is a professional trader, a former Silicon Valley money manager, and the man who knows how to speculate on the negative market movements. He is known for his trades at the verge of Black Friday and the dot-com bubble burst. All in all, he is the man who knows how to turn a crisis into a trading opportunity and has done so numerous times. In today’s article we will provide two valuable tips from Jeff with regards trading a depreciating stock.
According to Jack, it is easy to get completely wiped out by buying a stock that is still losing in price. Instead, you would want to buy a falling stock when its price is at the very bottom and the trend reversal is imminent. It is when the stock price is at its minimum that a trader should open a bullish position in the said stock and hold onto it. Jeff claims to know how to pinpoint this exact moment.
Take a look at this Volvo graph. It can be seen that October through December 2018 the company has been going through a rough time. The bearish period was long enough to deplete accounts of those willing to invest in the company during the first positive retracement, as Volvo kept losing for quite long after a short-lived revival of late October – early November.
The first rule of buying falling stocks, according to Jeff Clark, is to never buy the first dip. After the first one, says Jeff, there always comes the second. In this particular case, Volvo had to go through a series of three falls (and consecutive retracements) in order to reverse the negative trend.
Here comes Jeff’s second rule. Start exploring BUY opportunities after the second dip, but only if the technical conditions support the idea. For this purpose, you could consider using MACD, one of the basic oscillator-type indicators.
The logic behind it is simple. When MACD is demonstrating new lows, the negative trend is still strong and even lower lows cannot be completely ruled out. When the stock is falling but MACD is going up, the positive potential is building up. This is what happened with Volvo in the end of the previous year. After the initial price drop, MACD remained in the negative zone. Then MACD remained relatively flat (but also negative) for quite some time. When the indicator started moving in the upward direction, the company entered a revival and its stock price went up, as well.
By buying Volvo shares after the first two dips the investor would most certainly lose his money. By waiting for technicals to show positive dynamics and buying after the third dip, the trader could get a good company, destined to grow in the upcoming weeks and months, at a price below its intrinsic value.
All of the above is the opinion provided by Jeff Clark. It can provide valuable insights into the falling stock trading. However, you should remember that the market is chaotic and hard to predict. This strategy, therefore, cannot guarantee positive results 100% of the time.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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