Traders Blog

5 tips to survive a selloff
15/10/2018

There’s no two ways about it, last week was a pretty brutal one for American shares, and many others besides. It’s continued so far today with the FTSE 100 posting ongoing losses. What can traders of equity CFDs do to survive a selloff, though? It’s tough, and there are no guaranteed solutions, but read on for five key tips to manage risk during selloffs.

You can trade in either direction

‘If you can’t beat ‘em, join ‘em’ is certainly one of the more notable clichés you’ll find on these pages, but it’s no less true for that.

Equity CFDs can be sold as easily as bought

If every stock seems to be going through the floor and Bloomberg’s plastered with ‘SELLOFF’ on every page, it makes sense for you to consider joining in if it looks set to continue.

It’s true based on historical data that blue chip shares overall go up more than they go down, although this still shouldn’t put you off opening selling positions when the market requires it. The sky might not be the limit today (or this week).

Valuation, valuation, valuation

Professional analysts of deliverable assets don’t just write opinions: they base what they’re saying on data.

Booms without fundamentals are corrections in waiting

If you’ve been reading reports a lot recently and feel like ‘Our view is that xyz is overvalued based on…’, ‘Xyz’s valuation is difficult to justify given…’ and so on are burned into your eyelids, it’s time to think.

Valuations aren’t based on nothing. Unless earnings and revenues are accelerating rapidly, there’s probably no reliable reason for shares to keep hitting the roof every session. In this situation – as we’ve seen since last week – a correction’s pretty likely sooner or later.

Balance your trades

Of course, this is good advice at any time pretty much and for more-or-less any trader, but it’s especially important if you’re trading equity CFDs.

Diversification is especially important during selloffs

‘Buy FAANG and you’re dandy’ might be the watchphrase when everything’s, well, dandy, but at other times you’re not going to get very far doing this.

Shares across different industries are almost always affected differently by selloffs, as are other classes of instrument. The same advice you’d hear for deliverable assets can hold true for equity CFDs: pick a group of shares you’d be happy with pretty much whatever might happen.

Beyond this, though, you can also consider other instruments. If you’re in the middle of a selloff, it’s likely that gold and silver (plus often times the yen and franc) and going to spike. Watch the charts and there’ll often be opportunities elsewhere even if it’s grim for shares.

Reconsider being first to ‘catch the knife’

‘Result! Apple’s down 2%, fetch me my bargain, MT4!’ – not so much. Not necessarily, anyway.

First to buy after a correction? That's a big risk

It’s a huge, huge risk trying to be the first ‘hero’ who ‘catches’ shares just after a correction’s started. Nobody really knows how long it’ll continue or to what kind of levels.

Sure, it’s unlikely that any selloff in the foreseeable future is going to turn into a full-blown crash, but don’t mistake ‘unlikely’ for ‘impossible’.

Pick your spot: you could choose a key level of support from previous pullbacks or an important earlier level of resistance for a pending order. Above all, take it slowly!

Always watch earnings

Getting back on your feet after a selloff as a trader of equity CFDs is always tricky, but you’re shooting yourself in those same feet if you ignore earnings.

Monitoring earnings reports around selloffs is critical

Recoveries are often very jittery, at least at first, so you should try to pick symbols based on shares with solid fundamentals.

What you should definitely not do is immediately pick a big name only for the hope that upcoming earnings will give fuel to the rally. The feared ‘earnings cliff’ can turn a temporary retreat into a full-on rout even over the higher timeframes: the earnings calendar’s your friend during selloffs as well as booms.

 

Disclaimer: this article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

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