How Top Traders Adapted to Market Crashes and Recovered

For many traders and investors, reading a headline with words like ‘plunges’, ‘bloodbath’, or ‘crash’ can often give rise to feelings of panic and fear. Rising markets and falling markets are normal events in the lives of traders. However, in some situations, the decline may be steeper and have more momentum. Such an event is termed a market crash. Though these are tough phases to navigate, the world's top traders have adapted, recovered, and even benefited from such situations. Let’s take a look at the investing strategies used by top traders to deal with stock market crashes.

Resilience of the Top Traders

There are some tools and indicators that can help traders predict the direction of the market. However, in certain situations, these tools and indicators fail to deliver, resulting in traders getting caught on the wrong side of trades. This also happens during a market crash. During such difficult phases, it is the resilience of the traders that helps them adapt and recover. Let’s take a look at some of the top traders and how they navigated their way out of some difficult situations.

Jesse Livermore

Often considered one of the greatest traders of all time, Jesse Livermore (July 27, 1877 to November 28, 1940) earned big money in the market but lost it all, too, a couple of times. He made use of leverage to earn substantial returns, but that also meant he had to bear huge losses, which led to him losing his entire capital. However, he was persistent and adapted his investing strategies to make money even when the stock market crashed.

The Wall Street Crash of 1929 is considered one of the most significant stock market events ever and marked the beginning of the Great Depression. Despite share prices seeing steep declines, Livermore managed to earn a handsome profit since he had several short positions. Jesse Livermore faced several setbacks in his career but managed to bounce back and adapt to the dynamic markets of the early 20th century.

George Soros

George Soros (August 12, 1930) is one of the greatest stock market speculators of all times, and has often correctly predicted the market’s direction. Soros is also known as ‘The Man Who Broke the Bank of England’ for correctly shorting the British Pound and pocketing around $1 billion. Despite his stellar track record, Soros has faced major losses during the stock market crash of 1987, the Russian Debt Crisis, and the Dot Com Bubble.

Although George Soros saw losses that ranged from the hundreds of millions to even billions of dollars, he was quick to adapt his trading and investing strategies to mitigate losses and recover. His resilience also helped him generate returns following 1987’s ‘Black Monday’ crash.

Key Strategies for Surviving Market Downturns

As a trader or investor, it is important to use strategies that can help you even when the markets trend downwards. Let’s take a look at some such strategies:

Diversify

Diversification is one of the best ways in which traders and investors can survive a declining market. Diversification can help one spread out risks across various companies, sectors, and even asset classes. Not only can diversification help mitigate losses, but it can also help traders spot lucrative trading opportunities.

Go Short

Market downturns can prove to be a lucrative way to generate handsome returns. Thus, when share prices decline, one can earn a profit by going short. Along with shorting futures, traders can also make use of several option strategies to gain from market crashes.

Cost Price Averaging

A decline or stock market crash can also be an opportunity to get a better cost price average. Investors or traders with a long-term investment horizon can purchase larger quantities of shares as their prices decline. This will help them get a better cost price average and return to profitability sooner.

Stay Put

While adapting or changing your strategy during a market crash can be helpful, one can also make it through a market downturn by just staying put. By waiting it out, an investor can survive market downtrends.

Risk and Money Management

One of the most vital strategies for bearish markets involves managing your risk effectively. Having strict stop-losses in place can help you preserve your capital and move your money to low-risk or alternative asset classes.

A Trader’s Psychology during a Market Crash

Even if a trader has a solid strategy in place, it is crucial to adapt one’s psychology to the times to make it through volatile markets. Fear and panic are the most common emotions that take hold of traders when the stock market crashes. However, having a calm and patient approach in such situations can help one make sound decisions and deploy the right trading strategies. Instead of making impulsive decisions, a trader should calmly analyse and review the situation and then decide.

Portfolio Rebalancing & Risk Mitigation

When the stock market crashes or sees a bearish trend, traders and investors can look at it as an opportunity to rebalance their portfolio to mitigate risk. Typically, during a bear market, investors prefer moving their money from riskier sectors to less-risky, defensive sectors like FMCG and pharmaceuticals. Additionally, lower stock prices can also allow traders to bottom fish and pick stocks that are undervalued and have potential for significant growth.

Thriving in Market Chaos

The stock market can offer numerous opportunities during both uptrends and downtrends. Looking at the top traders, we can learn that resilience, patience, agility, and adaptability are some of the key skills that can allow one to survive and even generate profits from stock market crashes. Having a strong grasp on investing strategies and risk management can help traders efficiently survive a decline in the stock market.