Stanislav Bernuhov
Common Sense Trading
When you trade currencies or commodities, you may not be very aware of “market crashes” and large sell-offs on the stock market. However, for stock traders specifically, there’s much tension related to a recent significant decline in stock prices. Many of them have a cash account, i.e. don’t have the ability to play on the short side.
So, this article is for those who are still searching for profitable opportunities in the “red area” of falling stocks.
Option 1. Buying 3x inverted ETFS:
When there’s a bloodbath on the stock market, you can play one short side without actually selling any stocks. There’s a set of instruments designed exclusively for that purpose. They allow you to benefit from declining stock indexes, and sometimes, even certain sectors. I’m talking about “inverted ETFs” - complex structured products, which are traded on the exchange just like any stocks.
For example, you may purchase SQQQ, a 3X short for “QQQ”, which follows the Nasdaq stock index. When tech stocks are falling (and they are falling quite quickly), SQQQ grows. The recent decline of Nasdaq creates buying opportunities for SQQQ.
Option 2. Buying low-beta and negative-beta stocks.
Not all stocks are following the main trends. Some of them are more robust and have even strong opposite reaction when the broad market movements. The less stock correlates with a benchmark (a stock index), the less it’s beta is. Sometimes, it’s even negative.
For example, take a look at MCD - McDonald’s corporation. With a beta of 0.5 as of November 23, 2018, it shows outstanding performance in comparison to the broad market:
Or, let’s take SBUX (Starbucks). With a beta of 0.49 it seems bulletproof, considering the previous decline in major stocks.
Of course, not only beta parameters is important, but that’s one of the main factors which trader has to take into consideration while making decitions.
Option 3. Buying volatility ETFs.
Every time a stock market declines, we observe increasing volatility of ATM options linked to the corresponding index futures (VIX). This volatility can not only be observed but also it can be traded via volatility ETFs.
If you expect a stock index to fall, you can purchase VXX (short-term volatility) or VXZ (long-term volatility). You can see below what happens while the stock market sell-off:
Good luck and have a good trading!
Trading the financial markets is associated with increased level of risk. Past performance is not indicative of future results. All materials are provided for educational purposes only and by no means may serve as a trading or investment advice.
Editors’ Picks
EUR/USD eases toward 1.1700 as USD recovers
EUR/USD stays on the back foot and declines toward 1.1700 on Friday. The pair faces headwinds from a renewed uptick in the US Dollar as investors look past softer US inflation data. However, the EUR/USD downside appears capped by expectations of the Fed-ECB monetary policy divergence.
GBP/USD steadies below 1.3400 as traders assess BoE policy outlook
Following Thursday's volatile session, GBP/USD moves sideways below 1.3400 on Friday. Investors reassess the Bank of England's policy oıtlook after the MPC decided to cut the interest rate by 25 bps by a slim margin. Meanwhile, the US Dollar benefits from the cautious market stance, limiting the pair's upside.
USD/JPY rallies to near 157.00 as Yen plunges after BoJ’s policy outcome
The USD/JPY is up 0.85% to near 156.90 during the European trading session. The pair surges as the Japanese Yen underperforms across the board, following the Bank of Japan monetary policy announcement. In the policy meeting, the BoJ raised interest rates by 25 bps to 0.75%, as expected, the highest level seen in three decades.
Editors’ Picks
EUR/USD eases toward 1.1700 as USD recovers
EUR/USD stays on the back foot and declines toward 1.1700 on Friday. The pair faces headwinds from a renewed uptick in the US Dollar as investors look past softer US inflation data. However, the EUR/USD downside appears capped by expectations of the Fed-ECB monetary policy divergence.
USD/JPY rallies to near 157.00 as Yen plunges after BoJ’s policy outcome
The USD/JPY is up 0.85% to near 156.90 during the European trading session. The pair surges as the Japanese Yen underperforms across the board, following the Bank of Japan monetary policy announcement. In the policy meeting, the BoJ raised interest rates by 25 bps to 0.75%, as expected, the highest level seen in three decades.
Gold stays weak below $4,350 as USD bulls shrug off softer US CPI
Gold holds the previous day's late pullback from the vicinity of the record high and stays in the red below $4,350 in the European session on Friday. The US CPI report released on Thursday pointed to cooling inflationary pressures, but the US Dollar seems resilient amid a fresh bout of short-covering.
Bitcoin, Ethereum and Ripple correction slide as BoJ rate decision weighs on sentiment
Bitcoin, Ethereum, and Ripple are extending their correction phases after losing nearly 3%, 8%, and 10%, respectively, through Friday. The pullback phase is further strengthened as the upcoming Bank of Japan’s rate decision on Friday weighs on risk sentiment, with BTC breaking key support, ETH deepening weekly losses, and XRP sliding to multi-month lows.
How much can one month of soft inflation change the Fed’s mind?
One month of softer inflation data is rarely enough to shift Federal Reserve policy on its own, but in a market highly sensitive to every data point, even a single reading can reshape expectations. November’s inflation report offered a welcome sign of cooling price pressures.
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