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Trading During Turbulent Times • Berlusconi’s resignation • Greece Default? • European-Union Dismantle? • European Debt Crisis • Japanese Tsunami • Lehman Brothers Crisis
Trading During Turbulent Times • Microsoft share after Lehman Brothers
Trading During Turbulent Times • This is why experts recommend – always trade using the “Market Portfolio” • Instead of betting on a single stock – diversify your investments over all of the market’s leading stocks This is indeed a great advise. Yet how useful is it during turbulent times?
Trading During Turbulent Times • Dow Jones share after Lehman Brothers
Who Makes Profits During Turbulent Times? • Probably the most famous example of how to make enormous fortune during global crisis is George Soros – “the man who broke the Bank of England”. • During 1992, just before the UK currency crisis, Soros Betted that the British pound will not join the EUR-Group, and as a result will be significantly weaker. • He then opened large short positions on the pound. • Made about $1.1 billion during the crisis
How to Reduce Exposure to Falling Markets? • The main concern when participating in equity markets is the ripple effects of global/local crisis on our portfolio • When investors flee off the market – almost all prices fall. Including assets which don’t necessarily have direct link with the crisis
How to Reduce Exposure to Falling Markets? »Using “short” orders Problems: 1. Not always possible 2. Considered to be “Risky-Trading” 3. Positive inflation targets
How to Reduce Exposure to Falling Markets? »Using “put” options Problems: 1. Not always possible 2. Could turn up to be quite expensive 3. Hedging yourself can - at best - prevent losses. It cannot generate profits
How to Reduce Exposure to Falling Markets? »Shorting on Currencies • Unlike almost any other financial instrument – there are no restrictions on shorting currencies • Short and Long orders on currencies are basically identical • «Shorting» the Dollar vs. Euro is exactly like «longing» the Euro vs. Dollar
Safe-Haven Currencies There are three currencies which are typically being referred to as «Safe-Haven» assets • The currencies are: USD, JPY and CHF • This means that investors – worldwide – put their faith in these economies during times of crisis • Investing in the economy encourages speculators to long these currencies as well • The end result is…
Trading During Turbulent Times • EUR/JPY following Lehman Brothers crisis
Safe-Haven Currencies EUR/JPY fell from 170.00 to 119.00 within three months Potential position: • Opening a short EUR/JPY position of 500,000 contracts • Requires $4,000 in margin (using 1:125 leverage) • Profit potential: $235,000 • In simple words – longing the JPY against the second most traded currency in the world offered you a 5,875% yield within three months
What if the Crisis Takes Place in Japan Itself? • In April 7th 2011, Japan was the victim of one of the most horrifying natural disasters in modern times • The disaster included an earthquake and a tsunami • Developed into nuclear crisis • About 16,000 deaths and approximately 4,000 missing • Estimated loss to the Japanese economy: $35 billion ($35,000,000,000)
EUR/JPY Following Japanese Natural Disasters EUR/JPY fell from 123.00 to 103.00 within five months Potential position: • Opening a short EUR/JPY position of 500,000 contracts • Requires $4,000 in margin (using 1:125 leverage) • Profit potential: $110,000 • In simple words – longing the JPY against the second most traded currency in the world offered you a 2,750% yield within five months
And in Simple Words… • The Japanese crisis has reduced what was already a very low risk-appetite in the market • As a result, investors took their money and put it in what we previously called: «Safe- Haven» assets • Speculators saw the trend and immediately stepped in – taking advantage of the crisis • Global Crisis Stronger Yen
Another Alternative - Gold • One of the ancient investment in history of Mankind • One of the most used instruments for monetary exchange • Investors use it to hedge risks from Global uncertainty • Why…?
Another Alternative - Gold • Till Late 2007 Gold Never Reached over $700 an ounce • Then, investors who sensed the possible forthcoming crisis turned to gold • They understood the potential in investing in gold for hedging risks • The big break-though happens once again following the Lehman Brothers crisis • Gold is boosted and reaching an all-time record high of $1,900 an ounce • Until today, gold has more than doubled its value!
What Makes Gold so Appealing? • Universal Investment – isn’t valued by the strength of a single economy. • Isn’t Consuming Dependable – demand for gold does not depend on consumption power. • “Doctor’s Orders” – psychological effect. The “book” tells us – whenever markets crashes: “turn to gold”. • Simple Conception – doesn’t involve sophisticated investments.
The Bottom Line • Global crisis are terrible times. • People lose their jobs, their equity assets and even their pension investments. • It is very important, especially for those of us who invest their funds in equity markets, to know how to handle these hard times. • Investing in currencies and in certain commodities has proved itself – over and over again – as the most useful tool for the common man to rescue his funds, and perhaps even to gain capital.