Online trading rollercoaster: can you make money when the markets drop?

The start to 2022 has been incredibly volatile. The Nasdaq narrowly avoided its worst start to a year, while the S&P 500 recorded its weakest January market performance since 2009. 

The already volatile cryptocurrency market also declined dramatically throughout January. 

What should you do when the markets drop? Is there still money to be made? Fred Razak, senior trading specialist at CMTrading, the largest and best-performing broker in Africa, answers these questions and more: 

The start of 2022 has been disastrous for the Nasdaq — what happened? 

People are taking money off the table. Stocks are appreciating at levels I’m uncertain are sustainable. This type of growth of the past two years is not sustainable. So, the question is, what's the true value of the market right now? Consider Apple, Microsoft or Tesla. All these huge companies cannot sustain their earning revenues at these levels. It's just not happening. So, there will be corrections to the markets. 

What can traders do when the markets are down? 

Traders don’t have to bounce back for the markets. Good traders don't care which way the markets are going as long as there is volatility.

Since the beginning of the pandemic in March 2020, I would say even on March 18 2021, we have capitalised on the downside. We saw the worst, in terms of such a huge decline in the markets, in history, and now the markets have bounced back.

The Fang stocks (Facebook, Amazon, Apple, Netflix, Google) plus Microsoft, which reflect the Nasdaq, have not just bounced back, but they’ve almost tripled in size since then. Microsoft went from about $150 (R2,273) to $300 (R4,546). Facebook and Apple also tripled in the past two years. Amazon saw tremendous appreciation in the price of its stock. So, the fact that we retrace for the first time since 2020 is well overdue. The markets will correct themselves, and that's normal.

Is there still money to be made?  

This is probably the best trading environment that anybody could be involved in, perhaps in history. It's unbelievable what's happening in the markets. The volatility is just so overwhelming, I think, for traders and investors alike. If you're an investor, you'll go through a rollercoaster, but if you're a trader, you are taking advantage of these moves. You really have a tremendous advantage on the market.

I speak to traders who are making money hand-over-fist. As long as they are cutting their losses small and they're taking advantage of the upside and the downside, it’s a great space to be involved in.  

Can you profit when the markets are down?

Traders know that they can make money on both sides of the market. When the market goes up, they buy an asset and then sell it for a higher price. Or they could short-sell something at a higher price and then cover that short and buy it at a lower price. 

You can profit when the markets go up or down. Most of the money I've made is when the markets were on the way down. I could show you some of my trades from 2020. Some of these occurred where I anticipated the markets going down and I took trades early on and was able to really take advantage of these huge types of drops. 

This does practice and some years of repetition of watching the same things occur. It does take a certain skill, yes, but it's doable. I'm not necessarily smarter than anybody else. You need to accumulate experience and apply proven strategies. There is no secret recipe here. It's not like Coca-Cola. This is straightforward: you apply skills and execute in a disciplined fashion you should be able to make money over a consistent period, no matter what the markets are doing.  

Advice for traders? 

Traders should always be cautious but be able to go on the offensive. Once you apply some managed risks as part of your trading profile, then even if you lose, you are not losing irresponsibly.

Traders understand that there are risks involved, but if you curtail how much you are risking, then you are protecting yourself. It is similar to wearing a seat belt.

So, if traders are cognisant of the risks and are applying certain strategies to protect themselves, they should be fine. I would say that this is the type of environment in which they should be able to make many times what they would normally be able to make. 

Wondering how to become an online trader in 2022? Visit CMTrading’s website where you can try commission free trading. Register here to get started.

This article was paid for by CMTrading. Follow the broker on Facebook, Twitter, Instagram, LinkedIn and YouTube.