5 useful tips to survive a market crash

Market headlines don’t exactly sound cheerful these days, leading some to worry that another crash could be brewing.

How can your account survive if this happens? Here are five tips to keep in mind:

1. Stay rational

This is simply a more constructive way of saying “DO NOT PANIC!”

Sure, it can be annoying to see market heatmaps flashing red, so you have to remind yourself to keep a cool head and focus your energy on looking for profit opportunities.

Of course, this is actually easier said than done. Not everyone can stay calm and composed when they see their portfolio bleeding.

Take a deep breath and a few minutes to answer questions like these before taking any action in the heat of the moment:

• Are there changes in fundamentals that suggest it is better to cut losses?
• Has market sentiment changed towards your trade?
• Is the asset still trading within its usual volatility range?

2. Don’t be greedy

On the other hand, suppose you are able to move in the big market and make it rain.

Should you keep pressing your edge?

Under normal circumstances, probably. But during market crashes, you might want to consider playing it safe.

You see, investors are very fickle and sensitive at times like these, so risk appetite can change on a dime.

Even the tiniest whiff of a comeback or upside can lead to a sudden rally… before the gains are suddenly reversed later.

If you’re already looking at decent profits from a particular setup, you’d be better off taking the profits. Just call it a day (and a bird in hand), especially if you can’t keep your eyes on the charts for a long time.

Either that or adjust your stops to lock in some gains or close out part of your position just in case the market swings wildly against you at some point.

3. Pay attention to the lever

Leverage is a double-edged sword, meaning it could destroy your portfolio if you don’t handle it properly.

While leverage allows you to trade positions larger than your balance, it can also close your entire account if the price moves relative to your trade.

As we briefly mentioned earlier, asset prices tend to rise when investors feel nervous.

Even if your analysis is perfect and you’ve got the general direction right, you could end up getting the dreaded margin call just because Mr. Market has a nasty mood swing.

4. Look at other asset classes

Trading during a market crash is not as simple as shorting everything.

Some markets don’t even allow short selling, while others have circuit breakers that prevent prices from falling.

If you decide to stay out of the markets during a sharp selloff, you could use the time to learn about other asset classes and financial instruments that may offer better profit opportunities.

If you’re already into other markets, you might also consider rebalancing your portfolio to account for changing levels of risk in stocks, commodities or bonds.

5. Learn from previous market crashes

Finally, reviewing how markets have fared during previous recessions would also provide valuable insights into how to handle ups and downs.

For example, remembering that the stock market crash of 1929 caused stocks to drop nearly 90% over a three-year period would bring some perspective to the booms and busts.

Identifying the similarities and differences between these market crashes would help you keep an eye out for patterns that might repeat themselves and remind you to always keep your guard up.