Find out why a good trader embraces a market drop.

If you know how to trade the?markets, you often embrace a market that falls.

As a customer of The Portfolio Platform, you shouldn't fear drops in the market.

If our traders are underweight when it happens, then it’s an opportunity.

Stock markets do not go up in a straight line, they never have, and they never will. If you have money in a pension, or a long-term investment, it may often feel like they do because you will only check them at the end of every year and time reduces perceived volatility.

Occasionally we will get years like the current one which cannot be predicted, and they tend to hurt everyone. But a quick look at a 5-year chart of the S&P500, which is currently down over 17% this year, will show you that this is not the norm.

?Even on this 5-year chart, we can see some big peaks and troughs. This chart is the reason that we are fans of index trackers. Over time, stock markets increase in value, it is the fundamental belief of equity investment and empirical evidence shows us there is no refuting the argument.

Even on a long-term chart, the ups and downs we can see here are fairly consistent, but if you’d stuck with an S%P tracker, you would have made good returns over the 5 years.

However, although we do offer trackers that return 2 or 3 times the index, most of our traders are much more active and will look shorter term than this. We don’t tend to day-trade, but it is possible that huge moves can happen in a single day and money can be made as a result.

On Tuesday, we saw the 9th?largest devaluation of the US stock market in a single day in American history. That is an amazing move. However, it wouldn’t even show up on a 5 year chart as next week, we may be halfway back to where we were.

Many customers of The Portfolio Platform are seeing these moves live for the first time and the volatility surprises them. Inexperienced traders or retail investors, if left to their own devices would buy and sell far too much, and more often than not, in the wrong places.

It is human nature to want to get out of your longs when you are hurting, ie. when the market is down. This is the same to the upside. Retail investors want to buy when the market is up because they are excited that the market is rising.?Emotion is the reason 80% of retail traders lose money.

If you look at the chart above and think of it as a chart of emotion, we can see when panic would have forced most to sell and when fleeting optimism would have suggested the same people bought.?This is the exact opposite of what you should do, but we all find it hard to fight our emotions.

Having been a trader for over 20 years, I can tell you that it takes a long time before it becomes natural to buy when you’re down (losing money, fear) and sell when you’re up (could it go up more…? Greed).?

We actually want the market to fall sometimes, in fact we need it to fall to make more money.?Nobody likes losing money; if the market only went up our job would not only be stress free, but it would be rather easy.

It isn’t.

Traders do always find it easier to make money in an upward trending market, but we don’t always get those. This year in particular has been poor. It was the worst first half to the global stock market index in 50 years. BUT, even in bad years there are many peaks and troughs along the way and that is what we need.

Regardless of the overall market direction these provide opportunities, and this is how our traders make multiples of the normalised index returns. It is also how they make money when a market may appear to be moving sideways.

Let have a look at the 6-month DAX chart for reference. The DAX is the German stock market which has had a particularly volatile year due to knock on effect of energy prices and high inflation.

?It hasn’t had a good 6 months, but the market gyrations are very clear here. Do you think you could make money in this market? As we’ve discussed many times, most retail traders struggle with their emotions and when the market falls, they sell out. This has been extreme this year and so I imagine results for amateur investors will be particularly poor.

However, if you take a step back, take out the emotions and look at the chart of the PAST 6 months you could easily spot good buying opportunities and good selling opportunities. Hindsight does make trading look a lot easier but if you’re used to market moves and can handle drawdowns effectively, every market offers a chance to make money.

If the market had gone down gradually in a straight line then only one trade would have worked – a 6 month short; but it didn’t, and it never will. Whichever direction it moves in, it will always have big ups, and big downs along the way.

Here is how our very own DAX trader coped with the last few months.

?As you can see, most trades are on the long side of the market and even though the DAX is currently trading 13,059, the same level it was trading in June, the trader has consistently produced returns.

If the market didn’t drop, then this couldn’t have happened. You can’t seize a buying opportunity if one never presents itself. All our strategies show the drawdown of each individual trade. When we buy, it doesn’t go straight back up, we wish it did but it doesn’t; there will always be a further drop because nobody can predict when, only that it?willgo back up.

From the trades above, the largest drawdown was 7.8%. Our traders use leverage so drawdowns are inevitable and often heightened. If you were linked with ￡50,000 to this strategy, at one point you would have been down 7.8% on the trade. This would have been when an inexperienced investor may want to get out and cut their losses, but our traders are professionals, and if they believe in a position, they will wait.?

The most recent trade made $2,240 with a drawdown of only 3.65%. While we wish they could do that every time, they won’t. Being honest about returns is important in our business. Portfolios go up and down – all we look to do is make them go up over time, and more than the relative indices.

This is simply how it works. Customers of TPP are used to the?ups and downs, and eventually they?enjoy them as they?come to realise that the lows and highs get higher, meaning long term growth on your portfolio. The one thing we’ll never be able to stamp out is the volatility, and right now, there is a lot of it.

Our traders sold out a lot of their positions on Friday, Monday, and Tuesday morning before the drop. Most still maintained some longs as the markets were moving nicely in our direction, but nearly all went from overweight to underweight. They are now buying back in gradually to take advantage of the next move up.

?We often just assume the narrative in the market is right. If stocks drop, all we get to read is how it could drop further; if they are rallying, we will read how high they COULD go. The narrative then changes very quickly as the market does.?Don’t always believe that what people are saying is why the market is moving, it is usually the other way round.

We’ve had a big drop after a nice rally. Of course, it could go either way from here, if it goes down, I imagine our traders will look to increase their positions, if it goes up, all our portfolios will perform well and profits will be taken with the hope of doing it all over again.?

When the market eventually returns to its old highs, all our portfolios will be well and truly through theirs. This is how it works, and this is how we can offer something nobody else can.?

If you want to mix both passive and active investment strategies in your portfolio, have a tracker or two. If you want to take advantage of the fact that stocks are low and will return to old levels over the next few years, then have a leveraged tracker that will return 3x the index; but add one or two of our active traders to that mix and you may be pleasantly surprised by the returns in a sideways moving market.

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For more information please don’t hesitate to contact us?here ?and one of our highly experienced traders will get back to you.

Past performance may not be indicative of future performance, but we’re very confident in our traders and so should you be.

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If you'd like to schedule a call,?you can do so by clicking here.