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How To Trade During A Market Panic

Date: Tuesday, February 18, 2020 11:12 AM EDT

Market panic, or panic selling, is when traders sell an asset or an investment, causing prices to fall sharply. Panic selling is nothing new for the forex markets. In fact, it is so common that many stock exchanges have systems in place to curb the activity.

Market panic selling occurs amid rising investor sentiment on some negative news, impacting their investment. As more and more offers pour in, the price of the asset starts to drop rapidly. As a result, this could lead to a devastating effect, especially if the asset happens to be a stock.

Panic selling can occur in a number of ways, ranging from speculative positions (and short sellers) to economic and geopolitical issues. The impact of this is felt across different asset classes.

Many trading exchanges have now built-in systems that can automatically halt trading operations. This is done in order to give investors some time to digest the news. (It is therefore not surprising that many publicly listed companies hold their earnings call before or after the trading hours).

Although panic selling is closely related to a Black Swan event, not all qualify. For example, panic selling can occur due to some new information coming into the market. The duration of the panic selling can be from a few minutes to a few days at best. Also, it is mostly confined to only a few assets.

A Black Swan event, on the other hand, tends to trigger a wider selling and has global repercussions.

Examples of Panic Selling and Buying

There are quite a few examples of short term panic selling and panic buying as well. Because prices can move both ways, depending on what investors think and the assets or securities that are at risk.

Looking at the most recent events, here are a few:

WTI Crude Oil Prices – September 16 &17, 2019

Oil traders reacted sharply after reports of a Saudi oil tanker being hit by missiles fired from Iran. This promptly spurred buying activity. Investors believed that it could quickly escalate if Saudi Arabia responded in kind. But a cautious response from Saudi Arabia quickly quenched fears. Oil prices settled back as volatility eased.

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