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 MT4/MT5 platform, may 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 themselves 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 is known for his trades on the verge of Black Friday, and the dot-com bubble burst. In today’s article, we will provide two valuable tips from Jeff with regard to 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 should consider buying 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 may open a bullish position in the said stock and hold onto it. This is Jeff’s approach to pinpointing the exact moment to open a bullish position.
Take a look at this Volvo graph. It can be seen that from October through December 2018 the company has been going through a rough time. The bearish period was possibly 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 at the end of 2018. 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 likely lose his money. By waiting for technicals to show positive dynamics and buying after the third dip, the trader could get a good company, with the potential 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.
