Stock Market Crash Trading Strategy — What Is It?

Stock market crash trading strategy.

Volatility is a normal thing in the stock market — the prices of individual stocks and market indexes fluctuate all the time. But there are times when volatility is to the extreme, giving rise to a market crash.

A stock market crash is a sudden dramatic decline of stock prices and broad market indexes, resulting in a significant loss of paper wealth. There is no specific percentage decline that precisely defines a stock market crash, but it is generally a double-digit decline happening over the course of a few days. Market crashes often follow speculation and economic bubbles and are driven by panic selling and underlying economic factors. We end the article by looking at a specific stock market crash trading strategy.

Let’s take a look at some of the major crashes in the stock market.

What is a stock market crash?

A stock market crash is a rapid and often unanticipated decline of stock prices and broad market indexes, resulting in a significant loss of paper wealth. There is no specific percentage decline that precisely defines a stock market crash, but it is generally a double-digit decline happening over the course of a few days.

A stock market crash often follows a major catastrophic event, economic crisis, or the collapse of a long-term speculative bubble. It is a social phenomenon where external economic events combine with crowd psychology in a positive feedback loop characterized by reactionary public panic about a stock market crash inducing panic selling.

Typically, crashes usually occur under the following conditions:

• a prolonged period of rising stock prices (a bull market) with excessive economic optimism
• a market where price-earnings ratios exceed long-term averages
• extensive use of margin debt and leverage by market participants.

Other factors that can induce a market crash include wars, large corporate hacks, changes in federal laws and regulations, and natural disasters within economically productive areas.

What are the 5 most famous stock market crashes ?

There have been many stock market crashes in the US market, but the most famous ones include the following five:

The COVID-19 Crash in 2020

This is the most recent significant market crash. This was caused by the COVID-19 pandemic, which forced, many governments around the world to initiate a lockdown policy to slow the spread of the virus. The lockdown induced a mass panic, causing an economic shock that rattled investors.

The crash was remarkably very fast, as the market recovered in 33 days after a 34% drop in the S&P 500 index. That historically fast turnaround could be attributed to the U.S. government injecting trillions of dollars into the U.S. economy to support the economy during the pandemic.

Between printing money and stimulus payments, it was the most cash added to circulation since 1945. With so much money in circulation, what followed was an amazing upward run in the market as though the crash never happened.

The Subprime Mortgage Crisis in 2008

Also known as the Great Recession because of its ripple effect on the entire economy, it was the worst crash since the Great Depression. The crash was caused by a bubble in the US housing market brought about by banks’ loose lending practices for mortgages (particularly subprime mortgages).

Some banks declared bankruptcy, affecting the global markets. The S&P 500 fell nearly 57% from its peak and many lost their retirement investments. Recovery took around 17 months. It came from numerous government bailouts, fresh injections of cash into the economy, and interest rates slashed to historically low levels. There were also tougher regulations for financial institutions.

The market took around 17 months to recover, and what followed was one of the longest and most profitable bull runs in history began in 2009 and lasted all the way to 2020 before the COVID-19 pandemic crash happened.

The Dotcom Bubble Burst in 2000

The advent of the internet caused a bubble in tech companies in the 1990s, often referred to as the dotcom bubble, caused by the overvaluation of tech companies or anything that has dotcom in its name. Most of those companies had high valuations that couldn’t match their financial status. Investors were trying to chase the next big thing and were investing in companies that never had revenues.

Tech stocks are mostly listed on the Nasdaq exchange. Between 1995 and 2000, the Nasdaq rose more than 585%. By 2002, the Nasdaq composite index, fell nearly 77%, the first crash of