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.
S&P500 – August 5, 2019
The equity markets, including the Dow Jones index, plunged sharply on the day. The biggest one day drop came as China allowed its currency to fall below a key level. This came at the height of the US and China trade wars. The result was that equities fell sharply and yields in the bond markets plunged. Losses were seen across Asia, Europe, and the United States.
Should you Risk Trading During a Market Panic?
Talking about the advantages of trading during a market panic, volatility tends to rise off the charts. What this means for short term FX traders is that the volatility can come to their advantage. There are profits to be made, no doubt. But the risks are equally high.
If you get your trade wrong, you would be on the tap to lose quite a lot, if not all, of your invested capital.
On the other hand, if you are already in a position and the market is moving in the right way, it can offer some immense benefits such as risk-free rewards. But here too, a forex trader needs to keep their emotions in check.
The biggest question is where to book profits. But even before you ask this question, you need to look at your contract sizes to see if you are able to scale out of the position without risking the profits that are already on the table.
Although market panic events can be lucrative, you need to exercise caution even if you are a regular FX trader. A small mistake can quickly snowball into a loss that will take a lot to recover from.
Having said that, market panic is nothing new. It, after all, underlines the fact that the markets are irrational. The price movements are merely a reflection of investor sentiment of greed or fear. No matter how many tools or custom technical indicators you use, there is no way to predict a market panic and most of the time, there is no way to figure out how traders are going to react.