How to survive and make money during a stock crash - top strategies

Few people anticipate stock market crashes. As in the case of John Paulson, a speculator who bets against the market and opens a short position enters an extremely risky game. First, playing against the market is a priori risky, and second, by borrowing a stock, the speculator can incur large costs associated with paying commissions, and rollovers.

Besides, to predict a collapse you need either to have the appropriate education or a strong intuition, or both, and such a combination in one person is quite rare. Over the past 10 years, stock indices have been rising steadily, interrupted briefly by the U.S. trade wars with China, the collapse amid a coronavirus pandemic, and the Russian invasion of Ukraine.

During this time there were quite often opinions of experts, according to which stock markets were about to collapse and enter a prolonged phase of a downtrend, but each fall for the above reasons was soon used for large-scale purchases, and the indices continued to reach fresh heights.

Based on this we can conclude that the best trading strategy in the stock markets is to open long positions, i.e., buying stocks. However, at this stage, we have to take into account that after the 2008 crisis, the world's central banks cut interest rates all the way to negative to stimulate lending and save the economy and at that point investors had no other choice but to buy stocks.

Now, accelerating inflation has forced central banks to raise rates, so stock indices are unable to continue rising and are under selling pressure. So investors have to tolerate down periods and hedge the downside risks of the stocks they buy.

Various strategies are used to hedge long positions, including buying options, inverse ETFs, etc. The essence of such hedging of longs in shares is to open an opposite position, i.e. if shares begin to fall in price, the investor's losses are compensated by profits from the above and other instruments.

But the problem for novice traders, in this case, is that all these instruments are available to large investors, usually large investment funds, and these strategies are developed by highly paid specialists with appropriate education obtained at prestigious educational institutions.

As a result, a beginner trader is left with a banal strategy when the trend reverses - to exit the position at the breakdown of technical support levels and reopen the position at the following levels. If the trader can afford it, he can hold a position and add purchases from technical levels, but it is not suitable for margin trading.

The principle here is that owners of capital are always (!) looking for where to invest it, i.e. they will always buy back cheaper shares, unless, of course, the issuing company is on the verge of bankruptcy. That's why there is always a rise after a prolonged fall.

In the chart above, we see a series of declines, which have always been followed by rallies. So every fall was an excellent opportunity to buy, even if the speculator was already longing for the stock.

Another way to protect against a collapse was asset diversification, i.e. buying stocks in different sectors of the economy, preferably in different countries. As a result, only part of the stocks in your investment portfolio can be exposed to a stock price collapse, though even that will not be a panacea.

A more affordable way for a rookie trader to hedge potential losses from buying stocks might be to take a long position in the Volatility Index (VIX), also called the "fear index. At every fall in the stock market, it reacts with growth, which can compensate (most likely partially) losses from purchases.

Be that as it may, investing (buying stocks) in the stock market is mostly a long-term game, so the trader should initially have patience. Short-term stock market transactions are unlikely to be effective.

Also, if you want to use all available trading tools to increase your capital as soon as possible - follow this link below, or contact us via live chat. Our experts will help you to choose the best strategy for success.