How to Survive Panic Selling in Forex and Stock Market Trading

Panic Selling is one of the nightmares of investors, whether they are in Forex Trading or the Stock Market. The truth, unpleasant but unequivocal, is the following: Panic Selling is very difficult to control. One could hypothesize a metaphor in which Panic Selling is the anomalous wave, practically a tsunami, and the investor is the surfer. It is evident that staying standing or, once in the water, not drowning is very difficult. Yet, it is possible to control Panic Selling, but first of all, it is necessary to know what it really is and what causes it. Here is an exhaustive guide.

What is Panic Selling

Panic Selling is defined as that phase of the market characterized by an anomalous wave of sales. This wave is the result of fear, irrationality, and is fueled by a vicious circle in which the volume of sales increases due to fear, and fear increases due to the growth in sales volume. In short, it is the classic dog chasing its tail, whose victim is always the same: the price. During Panic Selling, the price collapses, reaching lows never touched before. Investors, driven by feelings such as, indeed, panic, are only interested in getting rid of the asset, regardless of the price. Panic Selling is the true specter that haunts the market. It is infrequent, but not rare. Cases abound. If we look at the last hundred years, we cannot fail to mention the greatest Panic Selling in history, that of October 24, 1929. That day was soon dubbed "Black Thursday" and gave birth to the Great Depression which, as we know, upset the economic equilibrium of the entire world and even political ones. If we narrow the field to recent history, we can also stay in Italy (and Germany, too). In November 2011, a Panic Selling broke out in Europe. The victim? Italian government bonds. Apparently, the first arrow was fired by Deutsche Bank, which sold all the Italian bonds it had in its belly in a limited period of time. We can even overlook the consequences, given that they are well known to the general public: collapse in the value of bonds, increase in yields, "wild" Panic Selling, in fact. From the outside, it seems that Panic Selling is the classic perfect storm, impossible to face. The only thing to do is wait for it to pass. Many times it is so, but the phenomenon can be somehow controlled. To survive, of course, but also to profit from it (if you are particularly good).

How to survive, and thrive, in a Panic Selling

The first thing to do is to analyze the context. Panic Sellings are not all the same and, indeed, their diversity can be a profit lever, a foothold to put an active approach in place. Different Panic Sellings, in fact, determine equally different risks and opportunities. If Panic Selling occurs at the end of an extremely bullish trend, there is little to do: it is only the beginning of the "end", and the worst is yet to come. In 1929, this is exactly what happened: euphoria was followed by panic. The advice, very difficult to follow to tell the truth, is to recognize it as soon as possible and get rid of the asset as soon as possible. Generally, Panic Sellings break out suddenly, but they can be predicted, in some cases. For example, if the price reaches a lateral phase after the breakout of an important resistance (calm before the storm). If Panic Selling occurs after a bearish trend, even a slight one, then there is some hope. The wave of sales, in this case, can be defined as the last powerful flare-up before the rise. The rebound effect, if not exactly guaranteed, is still very frequent. How to recognize a Panic Selling that precedes the rebound effect? Graphical analysis comes to the rescue. For example, the trader could recognize the V-Reversal pattern, which represents a very reliable signal. He could also notice a slowdown in volumes in the midst of Panic Selling. This is also a fairly reliable signal. In this case, there are two things to do. If you hold the asset, it is good to keep the position (if you have not exited at the beginning of the phase). If you do not hold the asset, and you want to take advantage of the rebound effect, it is possible to enter just before it occurs, let's say as soon as the volumes have shown the decreasing trend. Let's be clear, it's all very complicated, and often it's a matter of timing. The difficulty also derives from the fact that, while graphical analysis can be helpful, the same cannot be said for technical analysis in the strict sense. This is true, however unpleasant; firstly because Panic Selling is the apotheosis of irrationality, and this is not well integrated within analytical models; secondly because there are no support levels that hold: they have all been violently broken during the acute phase.