How to trade a Black Swan event

trading conditions

When they happen, they often take us by surprise and have a big impact as a result. However, since these events will always be a reality, here are a few tips for trading during a negative Black Swan event.

Hedge your portfolio

One of the best ways to protect your investments when a negative Black Swan hits the market is to hedge your portfolio. Hedging is a strategy to minimise the risk of adverse price changes for a particular financial instrument.

Whether you select individual stocks or ETF investments, you can use a variety of hedging strategies to reduce both downside and other risks. For example, if you want to hedge a short stock position, you can buy a call option on that stock.

If your equity portfolio is well diversified and you firmly believe that the stock market will fall from 4% to 7% over the next four months, a hedging strategy costing less than 4% could be considered.

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Look for stable blue-chip companies

Blue-chip is a term for shares of well-established companies known for their financial stability, reliability and quality. These stocks have a market capitalisation of several billion dollars and are usually market leaders in their sectors.

Examples of blue chip stocks in mt4 download include Walt Disney (NYSE: DIS), Coca-Cola (NYSE: KO) and JPMorgan Chase (NYSE: JPM).

Blue chip stocks usually provide a sense of security and tend to "survive" and recover during market crashes. It is also important to remember that a falling share price does not mean the company is going out of business.

Add small positions - don't go all-in

Some Black Swan events can cause bear markets, giving traders a great opportunity to buy stocks that are in freefall.

While this represents a huge opportunity to make money, it's not always good to go on a stock-buying spree as you could end up losing everything if the market collapses.

It also makes sense to take your money out of the stock market if you think there is a greater chance of a substantial downside, even if it means you have the same chance of missing out on a huge gain.

The 2008 global financial crisis

Another example of a Black Swan event is the 2008 Global Financial Crisis, which began in the mid-2000s when US banks sold too many mortgages to meet the demand for mortgage-backed securities sold through the secondary market.

In 2006, real estate prices crashed, triggering defaults and creating enormous ripples that severely crippled the financial industry both in the US and globally.

This forced Lehman Brothers (a prominent investment bank) to file for the largest bankruptcy protection in history in September 2008.

The filing not only sent a message that no institution was too big to fail, but also shocked consumer confidence in the economy. The impact of this event hit most countries and was severe on a global scale.

This crisis was a black swan, as hardly anyone could have imagined the negative impact it would have on the global economy.

The Covid 19 pandemic

As mentioned earlier, some people on Wall Street believe that the novel coronavirus (Covid-19) pandemic is the Black Swan of 2020. The flu-like virus, first identified in December 2019 in the central Chinese city of Wuhan, has infected tens of thousands of people and killed several thousand.

The Covid 19 pandemic has had a devastating impact on the global economy. It has triggered financial market routines not seen since the 2008 global financial crisis and raised concerns that the world economy is heading for recession.

No one could have predicted when exactly the next pandemic would break out or whether it would be the thing that ended the longest-running equity bull market in American history.

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