wall street – – Tradingsim

A zero-sum game may have a great impact on investors. It can beneficial to some and detrimental to others in a bull market. This TradingSim article will explain what a zero-sum game is and how it affects investors. In the article, I will also detail how the belief in zero-sum games can be altered and changed to an approach that benefits all investors.

What is a zero-sum game?

According to researcher Rozycka-Tran, a zero-sum game has the following definition:

“A general belief system about the antagonistic nature of social relations, shared by people in a society or culture and based on the implicit assumption that a finite amount of goods exists in the world, in which one person’s winning makes others the losers, and vice versa a relatively permanent and general conviction that social relations are like a zero-sum game. People who share this conviction believe that success, especially economic success, is possible only at the expense of other people’s failures,” wrote Rozycka-Tran.

In a zero-sum game is a game in which there is one clear winner and one clear loser. For example, there is a zero-sum game in basketball. If the Los Angeles Lakers are playing the Miami Heat and the Lakers win, they are the clear winner. In the zero-sum equation, in order for the Lakers to win, the Heat have to be the losers.

In economics, there is also the belief there are two sides of a battle. If one side is victorious, the other side must suffer a defeat.

Gordon Gekko, the ruthless main character in the classic movie Wall Street, believed that trading was a zero-sum game. In the high-powered time of the ’80s when traders competed against each other on the Wall Street trading floor, Gekko saw trading as a game of clear winners and losers. If one trader gained profits, another trader had to suffer defeat as a result.

“It’s not a question of enough, pal. It’s a zero-sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another,” said the fictional trader.

Is trade a zero-sum game?

The recent trade war between the U.S. and China amplified the belief in a zero-sum game. During the impasse, St. Louis Fed Senior Economic Education Specialist Scott Wolla wrote about the trade impasse in 2019.

“Many people suspect that international trade operates as a zero-sum game. That is, they think it is like a sporting event—a competition with rules that ends with a winner and a loser. Specifically, people sometimes think that if our trading partners are gaining through international trade, the United States must be losing,” wrote Wolla.

“In this view, exported goods represent a ‘win’ for the economy and imported goods represent a ‘loss’ for the economy,” added Wolla.

In the midst of the standoff, former ambassadors spoke about how President Donald Trump viewed the U.S. -China trade war. David Adelman is a former ambassador to Singapore. He noted that the trade impasse almost plunged the stock market into a bear market.

“He[President Trump] views trade, and he views even security issues, as a zero-sum game — if he sees one country benefiting or one of America’s counterparties benefiting, he makes the assumption that it must be coming at the cost of the American economy,” noted Adelman.

“So I think it’s not too far-fetched to see the President begin to look around the world and use this very blunt instrument to prosecute his case,” added Adelman.

Global economists don’t see economy as zero-sum game

Goh Chok Tong is Emeritus Senior Minister of the Republic of Singapore. He also doesn’t see the U.S.-China trade war as a zero-sum game.

“Strategic competition between the US and China seems inevitable, but it does not have to be a zero-sum game. Nor should it close off opportunities for mutually beneficial cooperation,” said Goh.

Goh advocates for a more measured approach to trade policy.

‘This moderate voice is… a voice for peace and stability, growth and prosperity, and an interdependent rule-based multinational order that is not reliant on the benevolence of superpowers,” said Goh.

In one zero-sum game definition, there is rampant inequality. Shai Davidai is a Columbia Business School assistant professor. In an essay, he noted that the imbalance in a zero-sum game leads to binary thinking that can hurt people.

“It’s this seesaw view of the world where we can’t all be winning,” said Davidai.

Dow Jones — Many investors believe stock market is a zero-sum game

In the essay, he also noted that zero-sum thinking in trade or economics leads to a limited solution to problems.

“Zero-sum rhetoric blinds us to solutions. It’s much easier to say, ‘It’s us versus them,’ than thinking, ‘It’s us and them.’ The issue is many of the problems that are really pressing in the U.S. and the world — climate change, inequality — all of those issues affect everyone. But they require broad support from different people and different groups,” added Davidai.

In addition to Davidai, law professor Ilya Somin also thinks that zero-sum game thinking is intuitive to many people.

“It’s intuitive to think in the very short term that more for some people necessarily means less for others,” Somin says. “accept fallacies — like, there’s a fixed number of jobs so if I get a job there’s fewer jobs for everyone else,” said Somin.

How does the zero-sum game approach to trade impact the stock market?

For many economists, the zero-sum approach hurt the stock market. The University of Chicago’s Steven Davis commented that the Trump Adminstration’s policy created uncertainty on Wall Street.

He noted that the policy led to a “capricious, back-and-forth character that amplifies uncertainty and undermines a rules-based trading order.”

Davis also noted that there was a drag on international trade “by leading firms to delay or [forgo] investments and hiring, by slowing productivity-enhancing factor reallocation, and by depressing consumption expenditures.”

Zero-sum trade philosophy hurt stock market

As a result of the U.S. -China trade war, there was a reaction from Wall Street. Research from the Federal Reserve shows a detrimental effect on the stock market. Mary Amiti, an economist at the Federal Reserve, said that the U.S.- China trade impasse caused a major reduction in the market value of many firms.

“We find that U.S. and Chinese tariff announcements lowered U.S. aggregate equity prices in our sample of close to 3,000 listed firms by 6.0 percentage points: a $1.7 trillion reduction in market value for our sample of listed firms,” said Amiti.

Some economic experts say zero-sum game didn’t hurt economy too badly

While many economists say a zero-sum strategy didn’t work , others disagree. Economics expert Marc Cherry said the U.S.- China trade war didn’t hurt the economy too badly.

“Such actions from nations as influential as the US and China don’t come without an impact that affects people from all around the world. In this instance, a variety of shifts have left most markets a little worse for wear, but most drastic damage has been avoided”, said Cherry.

How does a zero-sum game affect the chip industry?

In another example of a zero-sum game trade policy, the semiconductor industry in 2018 was also caught up in the U.S.-China trade war. Because many semiconductors are made in China, the U. S. tried to impose tariffs on Chinese imports. Myson Robles-Bruce is a semiconductor value chain researcher. He noted that the zero-sum approach to tariffs would hurt the semiconductor industry.

“For the semiconductor space, the escalating tariffs dispute between the United States and China will be a bruising zero-sum game. He believes it will be “injurious to both sides in which there are no winners,” said Robles-Bruce.

research in dictionary — Research needed to understand zero-sum game

“A tariff war between the world’s two biggest makers and consumers of semiconductors is likely to spread throughout the vast electronics supply chain,” said Robles-Bruce. He notes it’s “involving multitudes of markets, trades, and businesses. Both American and Chinese companies could end up suffering.”

“While it is true that the United States has tremendous leverage over China in chip design, China has immense power in the semiconductor supply chain. In this sense, both countries are needed to drive the industry. Businesses must then absorb somehow the increased costs resulting from the tariffs, or pass them on to consumers,” added Robles-Bruce.

Robles-Bruce believes that the zero-sum approach to trade doesn’t benefit America.

“There are no winners, ” added Robles-Bruce.

Semiconductor expert says zero-sum tariffs hurt industry

In 2018, Trump imposed tariffs on 25% of Chinese imports, including semiconductor chips. Devi Keller is director of policy for the Semiconductor Industry Association. She noted that China retaliated with hefty tariffs of its own on American imports into China. Keller commented that China could become a semiconductor leader with hefty American taxes on their chips.

“China is champing at the bit to assume a leadership role in semiconductor technology, especially with regard to chip manufacturing,” wrote Keller.

Keller is against a zero-sum solution to the trade war. She advocates alternative answers to the semiconductor battle.

“The most effective way for U.S. policymakers to attract semiconductor manufacturing is not tariffs, but financial incentives like federal grants, R&D[research and development] funding, and tax credits to build fabs and research facilities,” said Keller.

Some chip manufacturers say zero-sum approach had no impact on industry

While Robles-Bruce thinks a zero-sum game is hurtful, others think there was little effect on investors’ portfolios.

Ajit Manocha is CEO at chip industry association, Semi. He believes that the zero-sum approach to trade didn’t have a great impact on the industry.

He thinks that the “tariff has not really slowed down the industry.”

Some financial experts see stock market as zero-sum game

In addition to the trade war, many see the stock market as a zero-sum game. Lawrence E. Harris is a professor of finance. He summarized zero-sum trading.

“Winning traders can only profit to the extent that other traders are willing to lose. Traders are willing to lose when they obtain external benefits from trading. The most important external benefits are expected returns from holding risky securities that represent deferred consumption. Hedging and gambling provide other external benefits,” wrote Harris.

“Markets would not exist without utilitarian traders. Their trading losses fund the winning traders who make prices efficient and provide liquidity,” added Harris.

Harris wrote about how traders need to lean into the zero-sum approach to become a better trader.

“On any given transaction, the chances of winning or losing may be near even. In the long run, however, winners profit from trading because they have some persistent advantages that allow them to win slightly more often or occasionally much bigger than losers win,” wrote Harris.

“To trade profitably in the long run, you must know your edge, you must know when it exists, and you must focus your trading to exploit it when you can. If you have no edge, you should not trade for profit,” wrote Harris.

“If you know you have no edge, but you must trade for other reasons, you should organize your trading to minimize your losses to those who do have an edge. Recognizing your edge is a prerequisite to predicting whether trading will be pro table,” added Harris.

Investor John Bogle wrote that trading is a zero-sum game because of the high costs of losses in a bear market.

“Trading is inevitably a zero-sum game before costs, and a ‘loser’s game’ after deducting the high costs of all those transactions. In economic terms, trading is a ‘rent-seeking’ function which subtracts value from Wall Street’s customers,” wrote Bogle.

Other experts explain zero-sum trading

Economist Paul Samuelson also noted that in trades, there are clear winners and losers.

“For every trader betting on higher prices, another is betting on lower prices. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader’s gain is another’s loss,” noted Samuelson.

Managing Risk — Managing risk is important in zero-sum trading

Another trading expert Dennis Gartman spoke about zero-sum trading.

“In the world of futures speculation, for every long there is an equal and opposite short. That is, unlike the world of equity trading where there needn’t be equal numbers of longs versus shorts, in the world of futures dealing there is. Money is neither made, nor lost, in futures; it is simply moved from one pocket to the next as margins are swapped at the close of trading each day,” said Gartman.

“Thus, every time there is a buyer betting that prices shall rise in the future, there is an equal seller taking the very opposite bet, betting that prices will fall,” added Gartman.

Some financial experts see trading as a zero-sum game

Santa Clara University finance professor Meir Statman noted that financial advisors should tell their clients that trading can be a zero-sum game.

“Advisors have to reach out and speak with them — not to assure them that everything is going to be fine, because you cannot promise what you cannot deliver. But they have to talk about contingencies. What is likely to be least helpful is to engage in trading strategies or rearranging your investments. If you sell, somebody buys; and one of you will turn out to be wrong. But you don’t know who it will be. That’s a zero-sum game,” noted Statman.

Financial expert Henry Blodget also sees trading as a zero-sum game. He said trading as is a zero-sum game that will be a disadvantage to day traders if they’re not experienced.

“Trading is a zero-sum game: Market moves aside, every dollar won by one trader comes out of the pocket of another trader. Day traders competing against Wall Streeters is the equivalent of a college football team (or Pee Wee team, depending on the day-trader’s skill) competing against a pro team,” said Blodget.

Financial expert says day trading is zero-sum game with winners and losers

Trader Oddmund Goette believes that trading is a zero-sum game. He said in an interview that day trading has few winners and many losers.

“Trading is what Nassim Taleb would call a highly scalable profession where just a few winners take most of the profits. You rarely read about the dentist or lawyer making $500,000 a year with very little variation and randomness, but admire the successful trader making 10 million,” said Goette.

“However, for every winner, there are so many losers. We tend to forget that the results of certain professions are pretty binary: you either become very rich (and/or famous), or you end up with nothing (literally),” said Goeette.

If traders are day trading as part of a work-from-home opportunity, they should be cautious about their trades to avoid large losses.

Financial experts see forex trader as zero-sum game

In addition to trading being a zero-sum game, many experts see forex trading as a zero-sum game as well. Robert Johnson is a professor of finance at Creighton University’s Heider College of Business. He sees forex trading as more high-stakes than trading stocks.

“Investing in currencies, whether traditional currencies or cryptocurrencies, is fundamentally different than investing in stocks, bonds, or real estate, ” said Johnson.

“Over the long term, investing in the stock market is a positive-sum game,” added Johnson.

However, Johnson sees investing in foreign exchange (forex) as a zero-sum game. For example, a trader bets on the U.S. dollar against the Japanese yen. If the dollar falls, the yen rises. So, if the yen rises, the trader is a loser in the forex market. Therefore, there is a clear winner and loser in forex trading.

“On the other hand, over both the short and long term, investing in currencies is a zero-sum game,” Johnson says. “When the U.S. dollar strengthens versus the yen, those holding U.S. dollar positions win and those holding yen positions lose an equal and opposite amount.”

Financial expert says trading derivatives is zero-sum game

In addition to forex, trading derivatives and options are seen as a zero-sum game. Financial analyst Justin Grossbard noted that trading derivatives requires clearly defined losers and winners.

“Given trading derivatives is a zero-sum game, traders are always looking for an edge. Even receiving market news a split second ahead of the masses could result in significant gains. Its why most brokers talk up the low latency of their servers and connection speeds. News and pricing communicated fast and in real time to traders is imperative as most money is made in the period of time leading up to and right after sensitive market news is released,” said Grossbard.

Financial expert Henry Blodget also says day trading is a zero-sum game. He believes that day traders are competing against more experienced traders on Wall Street to capture a lion’s share of profits.

Why investing is not a zero-sum game

While trading forex or options can be a zero-sum game, many see investing as a positive-sum game. Analysts at UBS, led by Mark Haefele, write that investing is not a zero-sum game. They argue that because the stock market grows and expands, there isn’t a clear winner or loser in investment. One reason investing isn’t a zero-sum game is because the Federal Reserve continues to help Wall Street.

“Stocks remain supported by Fed liquidity. Research shows that entering the market all at once has historically offered the best outcomes—even at record highs, where subsequent 12-month returns have averaged 12% since 1960,” said the analysts.

Citi economist Tobias Levkovich believes that stock trading is not a zero-sum game .

Investing strategy that beat zeros-sum game — Strategy is key to beat zero-sum game

“The stock market is not a zero-sum game. There’s a mistaken tendency to think that a dollar that leaves the equity market translates into a dollar less in the stock market. Equity prices often move on a change in perception typically caused by an upside earnings surprise, a takeover announcement, lowered guidance, etc., such that double-digit changes can occur without a single dollar even changing hands at that moment. Hence, while flows matter, they aren’t everything one should consider,” said Levkovich.

“Other facets can be as crucial to the understanding of likely stock price direction including economic trends, investor sentiment,” added Levkovich.

Investing leads to more growth and is not a zero-sum game

In addition to UBS analysts, many financial experts say investing will reap rewards that benefit many investors. Monica Sipes is a certified financial planner and senior wealth advisor at Exencial Wealth Advisor. She says that long-term investing is key to having more winners in the stock market.

“I’m investing in X for this reason, and I’m willing to stomach the volatility and the risk associated with investing. I know these returns are predictable, based on history,” said Sipes.

Tracey Gordon is a communications strategist in New York. She said that long-term investing leads to a growth in benefits for investors.

“Small pieces grow and, with the magic of compounding, they make a huge difference,” said Gordon.

Investor Morgan Housel says business can’t be a zero-sum game because stakeholders and business owners benefit from investments.

“Every business has three main stakeholders: Customers, employees, and shareholders. You can ignore any one of those for a while, but eventually all three have to be cared for. Otherwise they’ll revolt, and no company can survive when any one of the big three walks out,’ said Housel.

“Many companies can take care of one, many can do two. But getting all three aligned is brutally hard, because the easiest way to appease one group is at the expense of another. That’s why the rewards for those that can find the balance are so great,” said Housel.

Impact investing helps reduce zero-sum game

In addition to win-win investing, impact investing can help reduce zero-sum thinking about trading. Dutch investing firm CEO Altera Vastgoed Jaap van der Bijl spoke about how his firm helps investors and the environment.

“We are strong believers in impact investing,’ said Vastgoed. “Making your assets future-proof is a win/win for both investors and tenants, delivering returns to one and creating value for the other”.

‘We have set our goals on sustainability and we are very ambitious for a good reason,’ said van der Bijl. ‘We are delivering a dual return, financial and impact, and preparing for the future because we are spreading out our capex[capital expenditure] and also making returns more predictable for an unforeseen future, which is very attractive for investors who have long-term liabilities’.

Sustainable investing is contrary to zero-sum game

In addition to Altera Vastgoed, Third Economy is sustainable as well. The investment research firm combines research with sustainability.

“Most investors want to make money while supporting causes they care about but have been lacking an easy way to understand how their investments contribute to a sustainable economy. With the launch of VIA, Third Economy is filling that gap,” said Third Economy CEO and Founder Chad Spitler. “The depth of insight previously only available to the world’s largest investors is now accessible to all investors.”

Sustainability investing is not zero-sum game

Alex Bryan is Morningstar’s director of passive strategies research for North America. He said that ESG (Environmental, Social, and Corporate Governance) investing is vital to having investments that benefit the company and all investors.

“There’s a great realization today that ESG issues are investment issues,” said Bryan.

“They’re issues that can affect the bottom line, and that may not always be something that comes to bear immediately. But it’s something that I think more people are starting to understand is aligned with shareholder value maximization,” added Bryan.

discipline — Discipline is part of beating zero-sum game mentality

“The COVID-19 pandemic and movement for racial justice in the U.S. have kept attention on social issues, including workplace safety and diversity, and have likely added to interest in sustainable funds,” said Morningstar.

Sustainable investments contrast zero-sum game beliefs

In contrast to the cutthroat zero-sum game of trading with only some winners, sustainable investing seeks to benefit all investors. Morgan Stanley noted that more investors want to pick stocks in companies that help investors and society.

“Increasingly proactive, they [individual investors] seek products and solutions across asset classes tailored to their interests. They also want to measure the environmental and social impact of their investments,” said Morgan Stanley.

ClearBridge portfolio manager Derek Deutsch noted that he wants to invest in companies that benefit investors and their communities as well. His investment strategy contrasts the zero-sum belief that some investors must win at all costs.

“We want companies with sustainable competitive advantages, and that would include excellent corporate governance, and companies that treat their employees well, interact in a positive way in communities where they’re located, etc.,” said Deutsch.

Hedge fund founder Cliff Robbins said many investors now want to pick stocks that have a positive impact on investors and the world at large.

“The largest investors in the world, which control how stocks are ultimately valued, care about this. Endowments and foundations are totally focused on ESG considerations … pension funds care about it, labor unions care about the safety of their employees … the biggest asset managers in the world have now awoken and said ‘ESG matters to me,’ and therefore it’s going to matter to companies,” said Robbins.

Studies found that sustainable investing becoming more popular than zero-sum game investing

Financial writer Chris Farrell wrote that a recent survey found that sustainable investing is crucial before they pick a stock.

“And they found that more than half of the people they surveyed consider sustainable and responsible investments as safe havens, which in a way makes sense because companies with strong records on employee relations, environmental sustainability, corporate governance — they tend to do well over the long haul,” said Farrell.

Farrell also noted that a study of mutual fund investors found that ESG investments are crucial. The study revealed that mutual funds that had sustainable investments that benefited all investors performed well at the height of COVID-19.

“They found that mutual funds with high ESG ratings … have performed particularly well against various benchmarks during the pandemic. And so the results were particularly strong for those funds that have an environmental focus,” wrote Farrell.

Investment strategies are implemented to beat zero-sum trading mentality

Many investment firms see sustainable investment as key for investors. Pzena Investment Management ESG analyst Rachel Segal said that she may reject stocks that are sustainable. She notes that the stocks in her portfolio must go against the zero-sum game mentality.

“Sometimes we might reject a stock for an ESG reason. Sometimes we might actually see that the ESG reason is part of the reason why the stock is cheap, but also part of the potential turnaround, and we have confidence in management to help fix some of those issues. This ESG-lens is one of the many ways in which the firm approaches a stock”, said Segal.

“From our perspective, it’s really about the material risks to the investment and understanding how we can analyze those in a way to try and get the best risk-adjusted performance for our clients,” added Segal.

Calvert International Equity Fund Ian Kirwan noted that sustainable ESG investing presents a more holistic view of trading. He noted that a zero-sum game mentality to investing isn’t as rewarding to his fund.

“We use ESG as a source of information to hopefully tell us something about the investment we’re looking at. We don’t treat it with anything special … it is one of a number of different components that we use to paint the holistic picture,” said Kirwan.

Zero-sum game trading can pay off for some, but not for other investors

A zero-sum game approach to trading and investing may be beneficial to traders who want to trade forex or options. With those industries, there are obvious winners and losers with trades. The zero-sum sum trading may also be best for day traders who want a quick profit at all costs.

However, if traders want to hold their investments for a long time, a zero-sum mentality may not be best. The zero-sum trading belief will also not be good for investors who care about all investors being able to profit from trades. No matter how a trader looks at the stock market, TradingSim’s charts and blogs can help them simulate trading to find the best stocks for their portfolios.

Does turtle trading still work? During an economic downturn, many traders claim to have effective strategies to beat the system and still maximize profits. The turtle trading system is one of those systems. This article will explain the turtle trading system and how it worked for traders in the past. In addition, this article will demonstrate whether turtle trading could work in this volatile, coronavirus-addled market.

What is turtle trading?

When he met fellow trader, William Eckhardt, Dennis asserted that traders could be grown as easily as turtles on a farm that he saw in Singapore. (So, that’s the origin story of turtle trading’s name.) Eckhardt disagreed and thought that traders like Dennis had a natural gift. As a result of the disagreement, they decided to bet and see if Dennis could train random people to trade as well as him.

The turtle trading system started in 1983. ( Cue the Trading Places soundtrack.) Commodity trader Richard Dennis believed that anyone could be taught to trade to be an expert trader like him during the go-go time of trading in the 80’s. Richard became a legendary trader by the age of 26. During his time on the Chicago Mercantile Exchange, he built his net worth up to a staggering $100 million.

As Dennis noted in the book, Market Wizards, “I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

Who really started turtle trading?

While Dennis popularized turtle trading, Richard Donchian is the father of trend trading. Donchian started the system in the 1960’s with the following weekly trading rule:

“When the price moves above the high of two previous calendar weeks (the optimum number of weeks varies by commodity), cover your short positions and buy. When the price breaks below the low of the two previous calendar weeks, liquidate your long position and sell short.”

Donchian had an earlier system of risk-averse trend trading, but Dennis perfected the turtle trading system.

How did Dennis find his turtles?

When Dennis started the turtle trading experiment, he placed an ad in The Wall Street Journal and found 13 “turtles” out of the thousands who applied. He tested them with a series of true-or-false questions. Five of them are below.

Others’ opinions of the markets are good to follow.
Trades in big money are made when one could get long at lows after a big downtrend.
An investor should know where to liquidate if a loss happens.
It is not helpful to watch every quote for an investor’s trading in the markets.
If an investor has $10,000 to risk, an investor should risk $2,500 on every trade.

Dennis chose investors to be turtle traders if they chose 2,4, 5 as true and 1 and 3 as false.

How else did Dennis attract his turtles?

Dennis placed a wide-ranging advertisement in the Wall Street Journal. The ad looked like this:

Richard J. Dennis of C&D Commodities is accepting applications for the position of Commodity Futures Trader to expand his established group of traders. Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reasons for applying to: C&D Commodities 141 W. Jackson, Suite 2313 Chicago, IL 60604 Attn: Dale Dellutri Applications must be received by October 1, 1984. No telephone calls will be accepted.

Who were the original turtle traders?

One of the original traders, Michael Cavallo, recalled the simplicity of the advertisement.

“The ad looked like the New York Yankees looking for a starting shortstop,” said Cavallo.

Cavallo was one of the turtles from very diverse backgrounds. Dennis not only chose turtles from diverse backgrounds but also had diversity in gender as well. In addition to male traders, Dennis chose women to be turtles during a time when there were few women in trading. Cavallo was a commodities trader, but many of the traders were blue-collar workers like Jim DiMaria. DiMaria was grateful for the opportunity to learn from Dennis.

“That was enough to pay my grocery bills and I knew that was going to be secure,” DiMaria said.

Another turtle, Michael Shannon, was an unsuccessful broker until he became a turtle trader. He also noted that the traders learned a lot about discipline from Dennis.

“We’re purely technicians,” said Shannon. “Dennis taught us to be consistent, disciplined and execute the signals that come up and he was right.

What were the turtle trading system requirements?

After Dennis found his turtles, he gave $1 million of his own money to invest in their own accounts. Dennis placed an emphasis on mechanical trading over emotional trading. In addition to purely technical training, he also downplayed the importance of following financial reports on TV or in financial reports. ( No doubt, if Twitter was around, he would have disapproved of that, too.) Dennis put little faith in financial analysis.

‘You don’t get any profit from fundamental analysis. You get profit from buying and selling. So why stick with the appearance when you can go right to the reality of price?” said Dennis.

They could trade a maximum of 12 contracts a day for a month. There were six main turtle trading rules.

What were the turtle trading system rules?

Markets-What to buy or sell. Dennis told investors to invest in all major stocks, bonds, metals, commodities, and currencies. The turtles minimized the risk in multiple markets.
Position Sizing–How much to buy or sell. The turtles traded using a position-sized algorithm. The system looked at a 20-day exponential moving average true range. Turtles used that system to gauge the unpredictability of the markets. The turtles were trained to expand their positions when the market volatility was low. They traded in just 1% of the total equity of their accounts.
Entries–When to buy or sell. The turtles used two different entry strategies. The first entry system was a 20-day high or low. The second was a 55-day breakout entry strategy. Automatic systems create entry systems. Dennis told the traders to take all the signals on offer so they wouldn’t diminish the returns.
Stops-When to get out of a losing position. Dennis taught the turtles to stop losses whenever possible. A pivotal part of stop losses was determining them before the traders’ losses became too big.
Exits-When to get out of a winning position. There were two exit rules. The first rule had a 10-day low for short positions. The second rule had a 20-day/high low for long positions.
Tactics-How to buy or sell. Dennis taught traders about the psychological aspects or turtle trading. He also taught his turtles to exercise patience while placing orders during market volatility.

This TradingSim chart shows an example of trading through trend following.

Did turtle trading work when it first started?

Turtle trading had mixed results for the traders. One of the turtles, Richard Sands, claims the group netted $175 million using the system. Another trader, Michael Shannon, noted that despite the discipline they were taught, there was a lot of volatility.

“There are days when you take a significant hit and there are days when you make lots of money and of those the days when you make lots of money is probably the most psychologically damaging because suddenly you become fearless.”

How did trend following help turtle traders?

Shannon says he made about $3 million during his four years under Dennis’ tutelage.

Trend following was key to the traders. “The trend is your friend” is a mantra of turtle traders. That belief means that traders can follow trends of growth or value stocks to predict when the next bull or bear market will happen. Shannon noted the simplicity of trend trading.

“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend,” said Shannon.

Even if the trends plummeted, traders still made a profit. Author Michael Covel, who wrote a must-read book about turtle trading, The Complete Turtle Trader, noted that turtle trading worked for most of the first traders.

“Once you recognize that market moves are random you simply need to put yourself in a position where you can capitalize on a move when it happens,” explained Covel.

“Seven out of ten will be dogs but three will make money and trend followers know that the winners will pay for the losses and give them a tidy profit,” added Covel.

What are the key tenets of trend trading?

Financial experts like Ali Hashemian noted that trend following is a systemic and methodical way to trade.

“Trend trading is a systematic approach to investing based on an asset’s current momentum. “A number of different trade signals can be used, and traditionally there are set rules and risk controls put into place when using this trading strategy. Simply put, this trading style captures gains by riding the upward or downward trend in an investment,” said Hashemian.

While many day traders may want to just use the system for stocks, Hashemian says most trend trading can mostly be for futures or commodities.

“Trend trading is commonly utilized by commodity traders,” said Hashemian. “Most often this trading style will include price calculations, moving averages, and take-profit or stop-loss provisions. Traders will use price movement and technical tools to determine trading signals.”

“Signals can often cause a trade too soon, and thus full potential gains are not always captured,” said Hashemian.

How can turtle traders identify a trend?

There are three types of primary trends that turtle traders can monitor to make trades.

Uptrends happen when stock prices increase. Turtle traders can go long on the stock as it’s rising.
Downtrends happen when a stock is falling. A trend trader can go short on a stock’s falling price.
Sideways trends happen when stocks are reaching neither higher or lower points. Turtle traders may not act on these trends, but day traders who want to jump on short-term market movements may want to move on sideways trends.

What system can turtle traders use to monitor stocks?

The turtle system used the Donchian Channel, a trend-following indicator. When turtle traders use the Donchian Channel , they usually set the indicator to monitor stocks over a 20-day price range. The original turtles traded during a 20-day breakout. However, they would only trade if there wasn’t a trend from the previous 20-day breakout. Turtles felt that if the previous trend couldn’t predict a breakout, the next breakout would produce a trend. Traders felt that they were minimizing risk if there wasn’t a previous breakout.

The 55-day Donchian channel indicator was added to catch more long-term emerging trends in the markets. Traders didn’t have to wait for a breakout to fail before making a trade. The Donchian Channel indicator is still used today by many traders.

This TradingSim chart shows how the Donchian Channel can be used for low-volatility stocks.

Donchian Channel with Low Volatility Stocks

What are the top trend indicators for turtle trading?

The Donchian Channel is a moving average indicator. Moving average indicators are just one of the many trend indicators. Here are three of the most popular trend indicators to help turtles trade and track trends.

1.Moving average indicators find the average price of a stock over a timeframe, such as 20 or 55 days. It can predict past trends to help traders track trends better.

2.Average directional indexes track trends on a scale from 0 to 100. Values that range from 25 to 100 indicate a good trend for stocks. Values under 25 indicate weaker trends in stocks.

3.Relative strength index identifies momentum in overbought signals. They’re also used to identify momentum in prices. The relative strength index operates on a scale from 0 to 100. When a stock is overbought, the indicator is above 70. A stock is underbought if it’s under 30.

Why was the turtle trading system successful for some traders?

Trader Mike Martin noted the simplicity of the turtle trading system. Because the turtles only invested about 2% on a single trade, the turtles weren’t hastily risking too much of their money.

“The Turtle rules consisted therefore of a trend-following system of entries, exits and risk management. The model was built to catch the middle of the move and although Turtle trading results were volatile, the group was always managing risk. In essence, risk management was everything,” said Martin.

“The system is genius in its simplicity. A certain mathematical elegance can be found in its use of ATR [Average True Range] for entries, exits and position sizes and what you get out of each is up to you,” concludes Martin.

Shannon also believes that turtle trading was effective for him and other traders. However, the trading system didn’t work for all traders.

Why did the turtle trading system fail for some traders?

While some turtle traders made a profit when they were with Dennis, once they struck out on their own, the opposite happened.

“Interestingly the Turtles all made big money while they were working for Richard Dennis. However in 1988 when they went out on their own things it was another story,” says Covel.

“Many didn’t stick with it and fell apart. So even though there was a mechanical system that they all knew worked, at the end of the day other factors such as character issues became their downfall,” added Covel.

The overriding theme seems to be that systems may not change, but the market does. Financial analyst Mark Biernat noted that the turtle trading system may not work for two reasons. Ironically, the success of the program means it’s easier for other traders to copy. Copycats can alter the system and change a winning formula.

Biernet believes that the turtle trading system worked well for traders until 1996, when newer trading technology may have replaced the older trading systems of the 1980’s. He also asserts that the blue-chip stocks that were prominent in the 80’s like GM (NYSE:GM) are not as dominant as they used to be now.

This TradingSim chart shows an example of the blue-chip stocks the turtles traded.

Does turtle trading still work in today’s market?

As Al from TradingSim noted in an earlier article about trend trading, day traders may have to adjust their fast-paced trading schedule to move at, well, a turtle’s pace. While the slower pace may have worked with a more primitive trading system in the original turtle’s time, it may be different for more active traders. Busy traders tend to take action more quickly after monitoring the markets all day. However, turtle traders can watch trends develop for weeks, months, or even years.

While turtle trading worked in the 80’s, there are differing opinions about whether the turtle trading system would work now. In this era of Wall Street volatility, Dennis himself acknowledged that the turtle trading system could possibly work now. In an interview in 2018 before the current unpredictability, he noted could be harder to implement now because there was less volatility in the market two years ago.

“Well good luck with that one. The markets have changed a lot. What works is changing and is a bit of a problem, but what’s more of a problem is the lack of volatility. Volatility seems to me to have trailed off over the years intermittently. You know, I’d rather have the volatility back. I mean that’s a variable you can’t control, but I think that it’s more important than adjusting the system, although adjusting the system is important too,” said Dennis.

Original turtle trader says system is evergreen

Jerry Parker, a disciple of Dennis and one of the original turtle investors, believes that turtle trading is timeless. He believes that the pivotal tenet of risk management when trading stocks and commodities is pivotal.

In an interview in 2018, Parker asserted that the main philosophy of turtle trading can be implemented during a bull market or a bear market.

“Well, I would say the basic philosophy hasn’t changed. You’re continuing to do research, finding robust systems, and that means systems with the least amount of parameters that tell you how to initiate, liquidate, or stay out of a trade. We’re always looking to build systems that are based on momentum or based on range dependent discrete time frames where you’re confirming that a trend is in place”, said Parker.

“So, you’re always looking to capture directional price movement. Obviously, managing risk is paramount, so you manage risk from the trade size, you limit it in the markets and sectors that you trade,” added Parker.

Parker also said that the risk management strategy can be tweaked to adapt to today’s stock market.

“We have a risk management concept that overlays the portfolio that’s based on marginal utility. So, we’re harvesting profits along the way which is very different than what we did learn in the original Turtle trading programs. We’re still doing the same things, just a little bit differently than we used to,” said Parker.

Is turtle trading past its prime?

Gruppe Senioren mit Rentnern am Rollator und mit Gehstock

While Parker claims turtle trading is timeless, other financial experts say that turtle trading went out with Jordache Jeans. Trader Scott Michael Cole believes that turtle trading was innovative in the 1980’s, but wouldn’t be effective now. He believes that the turtles had fewer contracts to hold in a long or short position than traders have now. They only had 12 contracts, while there are many more for today’s traders. Therefore, Cole believes that turtle trading wouldn’t work now.

He contends that inflation was higher and there were more trades to follow in the 1980’s than there are now. Cole believes that turtle trading was effective when Dennis first started. However, with the current low inflation, turtle trading may not be as profitable as it was 35 years ago.

Turtle trading isn’t perfect, not even for the king of the turtles. Dennis himself lost $10 million during the Black Monday crash of 1987. He also had to settle a $2.5 million lawsuit brought by investors. The investors said that Dennis himself wasn’t following the turtle trading rules. Dennis settled the lawsuit with the investors, but denied any wrongdoing.

With fewer trends in the current markets, there is also only about a 40% profit from turtle trading. Traders can expect a 60% loss on average. Turtle trading critics argue that while trend following was profitable in the 1980’s with big stocks like GM (NYSE:GM), there isn’t as much of a payoff now.

Turtle trading could work for patient investors

While there are downsides to turtle trading, there can upsides if investors are patient. Some financial experts note that there are four key facts to remember for investors.

Take time with trends. Trend following means catching the trend right in the middle. Don’t rush into trends at the beginning and don’t come into the tail-end of the trend, either.
Position sizing should be minimal. In the current volatile stock market, keep each position small. Only risking 1 or 2% of funds on a trade can reduce large losses.
Diversification is key. Diversification is pivotal to turtle trading. The turtle traders of the 80’s invested in a wide array of assets, from stocks to foreign currency.
Capitalization. Turtle traders don’t need money from Richard Dennis, but they do need a good investing fund to make trades. Because this is low-risk, small-reward investing, emerging turtle traders need a substantial trading nest egg to soften the blow of trading losses, especially during market volatility.

Is there a psychology to turtle trading?

While the Donchian Channel may be an effective tool to measure turtle trading, there were other factors important to the turtle trading system. The turtle system may have worked or not worked for traders because of psychological reasons instead of financial ones. Shannon noted that there was a “psychological makeup for trading” that outweighed any broker experience.

Dennis noted that mental discipline was just as important to turtle trading as following his rules.

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad,” said Dennis.

Slow and steady rule-following wins trading race

Dennis noted that the psychological aspect of turtle trading was important.

“The majority of the other things that didn’t work were judgments. It seemed that the better part of the whole thing was rules. You can’t wake up in the morning and say, ‘I want to have an intuition about a market.’ You’re going to have way too many judgments,” said Dennis.

Fear and greed are the main driving forces behind trades. Dennis and his turtle traders took emotion about out of an investment. By just following the main rules and diminishing emotional trading, turtle traders can possibly maximize profits, according to Dennis.

“The market does not care how you feel. It will not prop up your ego or console you when you are down. Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed,” said Dennis.

Mind over matter in turtle trading

As Al from TradingSim noted in a previous article about trading psychology, “analysis paralysis” can hurt turtle traders. While it’s important to read financial articles from sources like TradingSim, ultimately, a turtle trader has to remove emotions from trading, especially when the market is volatile as it currently is now. It’s important to know when to exit a trade as a winner and when to cut losses.

Turtle traders have to learn to accept the risk that comes with investing. Even if there is limited risk in trend following, any loss can be emotionally devastating if investors put a lot of money in a stock. Even though they are following a trend, trends may change, especially with the current volatility in the stock market. Staying calm, especially during this volatile time, could be pivotal to success in turtle trading.

What questions should turtle investors ask?

Turtle investors may be mentally prepared to trade, but they still have to conduct research. Turtle investors often had to answer these questions every time they made a trade. If investors want to be experienced turtle traders, they should answer these pivotal questions.

What is the state of the market? The state of the market is just the current state of stocks. If Apple(NYSE:AAPL) is trading at $140, that is the current state of the market.
What is the volatility of the market? Risk management was important, so Dennis made sure his turtles monitored the stock market each day. If Apple’s stock fluctuated between $130 and $140, then the turtles said they had 1 N or unit of volatility. So, Apple’s volatility, in this case, would be 10 N.
What is the equity being traded? Turtle traders have to know the exact amount of money being traded. If they knew exactly how much they had, they could determine how much they were risking with each trade.
What is the system or the trading orientation? In addition to knowing the exact money turtle traders had available, they also had to have an exact plan for buying and selling stocks. That plan prevents traders from buying or selling stocks out of pure emotion. If Apple stock is tanking, a turtle trader won’t panic sell if they stick to turtle trader rules.
What is the risk aversion of the trader or client? Risk management was the name of the game of turtle trading. If a turtle trader has $1,000 to invest, only 1% or 2% should be invested in Apple stock. The minimal risk enabled turtle traders to minimize their losses.

Turtle trading can pay off- but only if risk is managed well

Trending stock turtle traders may monitor

Turtle trading may work now depending on a trader’s own talent- and temperament. In a bull or bear market, there are many factors that may affect turtle traders. They may have more success if futures or commodities instead of more volatile stocks. Successful trading depends on a trader’s own trading education and psychology. Traders may have success practicing simulated trading on TradingSim to determine for themselves if turtle trading is right for them.

Even though Dennis may not have approved of financial information, TradingSim probably would have been a trusted research source for Dennis and his turtles. With simulated trades on TradingSim, budding turtles can have the best risk management of all with no-risk trades.

Whether turtle trading works now or not, it’s a legendary system that will be studied for generations. Dennis noted that training his turtles was easier and more rewarding than he could have imagined.

“Trading was even more teachable than I imagined. In a strange sort of way, it was almost humbling. ”

The recent downturn in the stock market has many investors concerned about a prolonged bear market. The Dow Jones recently plunged to its lowest levels since the “Black Monday” stock market crash of 1987. How did the bull run of the 2010’s come to end in 2020? And what does this current bear market mean for investors?

What is a bear market?

Before the bear market of today, the original bear market reportedly got its name from fur salesmen in colonial times. Investopedia noted that the bearskin sellers were similar to stock traders of today.

“Historically, the middlemen in the sale of bearskins would sell skins they had yet to receive. As such, they would speculate on the future purchase price of these skins from the trappers, hoping they would drop. The trappers would profit from a spread — the difference between the cost price and the selling price. These middlemen became known as ‘bears’, short for bearskin jobbers, and the term stuck for describing a downturn in the market,” noted Investopedia.

Today, a bear market definition is much different. A bear market is a time when major stock indexes drop from a high point by 20% for an extended period.

When was the longest bear market?

The worst bear markets occurred during the Great Depression in the 1930’s. During that time, the Dow Jones cratered by almost 34% after a decline in stocks. Many investors bought the stocks on margin, borrowing funds from brokers. When stocks fell and investors couldn’t pay back their loans, there was a run on banks. The resulting bank runs and uncertainty about the economy led to the great stock market crash of 1929. That subsequently led to the Great Depression that lasted for about a decade until the U.S. entered World War II in 1941.

When did other bear markets in history occur?

During the 1987 crash, the markets dropped 31%. That decline was likely caused by a decline in the U.S. dollar after a widening trade deficit with Asian countries. In addition to the decline of the dollar, the new technology of program trading orders led to the crash. The then-new technology of computer trading had an automatic system that liquidated stocks after price decline targets were met. However, the sell-off led to more panicked selling and stop-loss orders.

As a result, Black Monday on October 19, 1987 led to a 22.7% loss in the S &P. After Black Monday, circuit breakers were put in place on Wall Street. Once losses reach 7%, traders have time to stop trading to prevent the Dow Jones from falling further.

The latest bear market in 2008 saw the markets decline by almost 25%. The last bear market was during the 2008 Great Recession. The Great Recession started after banks started failing after a previous boom in the early 2000’s.

Banks started failing after many low-income homeowners couldn’t pay their subprime mortgage loans after adjustable interest rates rose. Ironically, banks pushed these high-risk loans to consumers that ultimately led to their decline. Homeowners defaulted on their loans and the housing bubble burst. Once the housing market and banking industries tumbled, the Dow Jones fell by double digits. The Great Recession lasted from 2008-2009.

How has coronavirus caused the latest bear market?

Less than a month after hitting a record high of 29, 551. 42 on February 12, the Dow Jones sank 28%. The Dow Jones plummeted to 21,200. 62 on March 12. Fears about the spread of the coronavirus ( COVID-19) pandemic have caused a massive sell-off. The pandemic caused panic since February by spreading from China. The country is inextricably connected to the U. S. because of how many American goods are produced in China. The illness has spread to Europe and to America, with the world’s largest economy. Many other nations around the world have been impacted by the coronavirus.

Over 118,000 people have been diagnosed with coronavirus worldwide. The virus has claimed about 4,800 lives so far. The illness is apparently spread through large crowds. In the reaction to coronavirus has led to a global shutdown of nations affected, especially China and Italy. Coronavirus has caused the cancellation or slowdown of sporting events, travel, and other activities. These social activities that are driven by consumer spending throughout the globe are being disrupted.

The worries about the virus have caused a drastic downturn in trading. There was a halt in trading at the New York Stock Exchange for 15 minutes on several days the week of March 9 because stocks fell so low. The S & P 500 fell 10% on March 12 and triggered a “circuit breaker” that was supposed to halt trading and prevent a further decline. However, the Dow Jones continued to tumble and dropped 2,353 points on that one day alone.

Oil price war adds to Wall Street volatility

In addition to the coronavirus crisis, there have been wild swings in the stock market. The Dow Jones is rattled because of an impasse between Russia and Saudi Arabia, two of the world’s biggest oil producers. Russia refused to honor an agreement from the oil-producing countries of OPEC ( Organization of Petroleum Exporting Countries.) OPEC initially agreed to cut oil production by 1.5 million barrels a day to drive up prices. Russia refused to go along with the Saudi-led deal. As a result, Saudi Arabia increased its oil production and flooded the market.

Crude oil prices dropped 24% in response to the ramp-up of oil production. That decline was the worst since the start of the Persian Gulf War in 1991. The drop in oil prices led to more volatility on Wall Street. Foreign Policy columnist Jason Bordoff noted that Saudi Arabia could have an advantage over Russia in the oil price war.

“The problem for the kingdom is that Russia is more resilient to lower prices than it is, having added considerably to its foreign exchange reserves while Saudi Arabia’s fiscal cushion has dwindled since the 2014 oil price collapse,” wrote Jason Bordoff.

U.S. responds to global oil war

In response to the oil price war, President Donald Trump has ordered the U.S. Department of Energy to buy crude oil for the Strategic Petroleum Reserve. Trump made the decision after oil company stocks like Exxon and Chevron have plummeted by double digits. He also made the decision after crude oil prices dropped worldwide.

“Based on the price of oil, I’ve also instructed the Secretary of Energy to purchase at a very good price large quantities of crude oil for storage in the U.S. strategic reserve,” Trump said.

“We’re going to fill it right up to the top, saving the American taxpayer billions and billions of dollars, helping our oil industry [and furthering] that wonderful goal — which we’ve achieved,” added Trump.

The twin troubles of coronavirus and the decline in oil prices have led to volatility on Wall Street that ends the longest bull market in history.

Why did the bull market start?

The bull market ended after an impressive run before falling into a bear market. While the bear market comes when the market falls 20% below a peak, it’s the polar opposite of a bull market. The term bull market probably comes from the belief that bulls always charge upward with their horns. Therefore, when the stock market is doing well for an extended period of time, that is a bull market. A bull market means that the Dow Jones rises 20% above its current peak for an extended period of time. The latest bull market ran from 2009-2020.

Before the recent volatility, the Dow Jones was enjoying a record run of prosperity. The stock market rocketed 20% above its last peak in March 2009 and has soared ever since. The recent bear market ends the longest bull market that started in the spring of 2009.

How did the Fed help drive the bull market?

As the U.S. was surviving the Great Recession, the federal government’s $700 billion bank bailout helped revive the economy. In addition to the bank bailouts, the Federal Reserve helped lay the groundwork for the 2010’s bull market. The Federal Reserve spent $1 trillion on mortgage and government bonds to enable quantitative easing. The move pushed interest rates lower and enabled consumers to take out more bank loans and investors to buy more stocks.

The Fed also kept its federal funds target rate at a rock-bottom rate of 0%-0.25%. The federal funds target rate is the rate depository institutions charge for overnight lending to banks. That low rate empowered banks to borrow money at low rates and increase their profits.

In addition to the Fed’s dovish policy that led to helping businesses, the 2017 Tax Cuts and Jobs Act also boosted stocks. The business-friendly tax cuts helped lower the tax rate of corporations. Corporations participated in stock buybacks, which boosted companies’ stock prices.

As a result of all of those factors and a robust economy, Wall Street enjoyed 10 years of a skyrocketing economy amid rising stocks. As a result of the longest bull market, the S&P rose 330% over the last 11 years.

Why did the bull market end?

While the bull market had a long run, even before the coronavirus crisis, there were low points to the bull market wave. The recent Brexit controversy in the United Kingdom in 2019 temporarily caused a dip in the markets. Uncertainty about the United Kingdom leaving the European Union led a short-term dip in the global markets. The U.S.-China trade war started by President Trump also led to market volatility in 2019 as well. The U.S. and China engaged in a stand-off over tariffs led investors to worry about how international trade would be impacted.

With the latest volatility in the stock market, the bull market has officially ended. Coronavirus accelerated the Dow Jones’ decline. Just a month after reaching a record high, the Dow Jones has lost $6.7 trillion in value in the latest bear market. A mixture of a global economic slowdown and investor worries have led to a massive stock sell-off. The official end to the bull market was during the week of March 9.

What is the Fed’s response to the bear market?

Now that the Dow Jones in a bear market, many investors are watching to see what actions will be taken. In response to the Wall Street crash, government agencies are taking action again. The Federal Reserve lowered interest rates in an attempt to revive Wall Street. The U.S. central bank pumped up stocks by lowering its fund target rate to 0% in 2009.

Now the Fed is taking action a similar again a decade later. The Federal Reserve will cut interest rates down to the range of 0%-0.25%. That comes after concerns about the markets tanking the week of March 9. The Fed will also launch a $ 700 billion quantitative easing program. The Fed’s quantitative easing will be comprised of $500 billion of Treasury purchases. The Fed will also distribute $200 billion in mortgage-backed securities.

The Fed released a statement before lowering interest rates.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” noted the Federal Reserve.

The Federal Reserve added that it is making it easier for banks to issue loans to consumers. The U.S. central bank wants to help banks loan more to Americans. The Fed noted that it “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

New York Fed takes action in bear market

Local Federal Reserve banks will also inject cash to try to revive the market. The New York Federal Reserve also recently announced that it will purchase $37 billion in 30-year bond treasuries.

“These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak,” said the New York Fed in a statement.

The New York Fed will offer banks $1 trillion in loans in exchange for Treasury bonds.

Willie Delwiche, an investment strategist at Baird, hopes that the return in qualitative easing will help ease investors’ worries.

“If the market feels the Fed is responding appropriately and is helping investors and consumers, and feel like somebody is in charge, maybe that can help settle things down,” said Delwiche.

While the action was meant to help the stock market, the bank assistance from the Federal Reserve has had a mixed effect. As of the week of March 16, the Dow Jones still shed another 1,000 points. However, by March 17, the market jumped 1,000 points. By March 18, the Dow dropped again, losing over 2,000 points.

What will be the government’s response to the bear market?

The Trump administration is taking action to help boost the stock market. The government will offer paid leave to workers who have to stay home under quarantine. Congress is also in negotiations with Trump to offer a stimulus to help boost the Dow Jones. There will possibly a $1 trillion stimulus package that will give $1,000 to each American worker that has to work from home.

Some financial experts want the government to act more urgently to stop the bleeding on Wall Street. Joe Kalish, chief global strategist at Ned Davis Research wants the government to immediately pass a stimulus package to help the Dow Jones rebound.

“We need to see meaningful support for economic activity and credit backstops especially for small businesses, not a targeted approach executed only by the executive branch,” noted Joe Kalish.“We will likely need congressional involvement. This is a potential solvency problem.”

Should investing in a bear market include “buying the dip”?

Regardless of whether there is government intervention or not, investing in a bear market can either be financially savvy or a financial disaster. Many investors are encouraged to “buy the dip” and buy stocks during this huge sell-off. Buying the dip is buying stocks during a bull market when stock prices are lower.

Some financial experts like David Mazza say investors should buy the dip. The trading expert says investors should invest in stocks when they drop in a bear market. However, Mazza advises that investors should invest in a bear market under certain conditions. Mazza says investors should buy the dip only if they’re optimistic that the stock market will bounce back later.

“From a longer-term perspective, valuations across the market just got a lot more attractive. For investors that do not believe this will lead to a true 2008 type of global downturn, dipping your toes into the water does make some sense”, said Mazza.

Some financial advisors are against investing in a bull market

While some financial experts advocate being a bear investor, others are more hesitant. Mohamed El-Erian, chief economic advisor at Allianz, cautions against investors buying stocks in a bull market. El-Erian believes that investors are in for the long-haul should exercise caution before buying the dip because of the volatilty of the stock market.

“If you are a long-term investor, I would wait. I think fundamentals are going to deteriorate even faster. I think the policies and fundamentals are going to go in favor of bad fundamentals, unfortunately, initially,” said El-Erian.

Which stocks should investors buy in a bear market?

If investors want to make decisions on what stocks to invest in, there are stocks that are performing well in a bear market. Some stocks have been performing well as a result of the coronavirus outbreak. Costco ( NYSE:COST) stock has risen as shoppers have bombarded the store. They are panic shopping for items and emptying shelves to try to combat the coronavirus. The warehouse retailer’s stock surged 8% on March 13 and subscription numbers are up after shoppers rushed Costco stores.

Costco’s chief financial officer, Richard Galanti, noted that Costco members have bought many items during the coronavirus pandemic that have driven up sales.

“Members are turning to us for a variety of items associated with preparing for and dealing with the virus such as shelf-stable dry grocery items, cleaning supplies, Clorox and bleach,” said Galanti. He also noted that “water, paper goods, hand sanitizers, sanitizing wipes, disinfectants, health and beauty aids, and even items like water filtration and food storage items” are bestselling items in the stores.

Costco is selling out of Clorox ( NYSE: CLX), another stock that is performing well in a bear market. Clorox’s stock price rose by about 15% throughout 2020 as of March 13. The company that makes cleansing wipes and other disinfectant materials have been flying off store shelves in the wake of coronavirus. UBS analyst Steven Strycula believes that coronavirus (COVID-19) fears will continue to drive Clorox stock up.

“Based on conversations with retail buyers, we estimate COVID-19 related demand could boost baseline disinfectant category trends by 3-5x in the next few months as retailers work to rebuild inventory and stay in stock,” reasons UBS analyst Steven Strycula.

Working from home creates boom in Zoom stock

Another stock that has seen improvement in the wake of the coronavirus crisis is Zoom ( OTC: Zoom) . The videoconferencing software company has seen shares rise as more people are working from home. The stock surged by 24% over the last month. Zoom is continuing to show its strength a year after its IPO went public.

What stocks should investors avoid in a bear market?

Airline stocks are performing poorly in the wake of coronavirus. Shares in those industries have tumbled as a result of the virus scare. Many people are traveling less in America and there is a travel ban from Europe. All of these factors are making airline stocks a risky investment. American Airlines (NYSE: AAL) stock is down 50% over the past month. The airlines are hoping that a $50 billion bailout from Congress will help the industry rebound from its current losses.

In addition to airline stocks, cruise line stocks are a poor option for investors. Similarly to airlines, restrictions on cruises and cancellations have hurt share prices. Cruise lines that have been breeding grounds for coronavirus have been deeply impacted. Shares of Norwegian Cruise Line ( NYSE:NCLH) have cratered by 72% since the global pandemic spread.

Norwegian Cruise Line stock the week of March 9

Restaurant stocks suffer from social isolation rules

Another industry that is struggling amid the economic downturn is in the restaurant industry. Darden Restaurants ( NYSE: DRI) stock is down by double digits. The stock of the parent company of Olive Garden has tumbled by at least 16% since coronavirus spread in the U.S. Social distancing caused many Americans to eat at home instead of eating out at chain restaurants. Many restaurants are closing around the country through state mandates, but chains like Olive Garden will remain open. Olive Garden noted in a statement that it is adding hand sanitizing locations and separating tables. Darden also said it will give paid sick leave to employees that are not well.

“We are proud of our 190,000 team members for the support they are providing to our communities. One of the most important things we can do is to care for those who care for you. Recently, we rolled out a paid sick leave policy to every one of our hourly team members, so they can stay at home until they feel better while still being compensated”, said Darden.

Despite the precautions and proactive steps to help employees, restaurant stocks like Darden are taking a hit during the coronavirus pandemic. Restaurant stocks may further decline if the stock market continues to experience volatility.

Should investors choose inverse ETF’s in a bear market?

In addition to individual stocks, ETF’s (exchange-traded funds) have been hit in the bear market. However, inverse ETF’s have become attractive in the current bear market. As ETF provider Direxion noted, the ETF’s can offer a quick return during a bear market.

“These tools may be used when seeking to hedge the market. As their name reveals, inverse ETFs go up when the market goes down, and they go down when the market goes up. Inverse ETFs allow you to seek the opposite return of specific sectors and asset classes; for instance, the S&P 500, and Financials, Energy and Technology sectors,” said Direxion.

“Again, the thing to remember about these funds is that they’ll lose value as long as the market keeps going up. But the potential rewards can be attractive if the market suffers a setback. At the very least, inverse ETFs may serve as a hedge. It’s important to note that an –1x ETF which seeks 100% of the inverse performance of an index, is subject to daily compounding. However, basic math dictates that the compounding would be less than the compounding in a -2x or -3x leveraged ETF,” added Direxion.

Which inverse ETF’s would be best for bear investors?

Some inverse ETF’s that investors may decide to invest include these top ETF’s. ProShares Short QQQ had a 26% return during the 2018 correction and has an annual dividend yield of 1.76%. Direxion Daily S&P 500 Bear 1x and ProShares Short S&P 500 also had double-digit returns during the 2018 turbulence of the U.S.-China trade war. Those ETF’s could perform well during a bear market.

What ETF’s should investors choose in a bear market?

ETF analysts believe that the ETF industry can withstand the volatility in the stock market. WallachBeth Capital’s Andrew McOrmand advocates choosing options for ETF investors. He also wants investors to research the ETF’s before choosing these funds.

“We do know very active traders that don’t use options. I think options are a great thing,” he said. “I would focus on listed options, listed index options and ETF options, but understand that vol[atility] is high and understand the pricing, meaning that you are going to pay up to put your idea on and, certainly, there’s risk in selling those ideas,” said McOrmand.

“For ETFs themselves as listed tickers, you could look at liquid alts[liquid alternative investments] like QAI and MNA, which are less correlated to the overall market and can dampen volatility,” said McOrmand.

Tom Lydon, CEO of ETF Trends, believes that the ETF’s are a safe option in the wake of the current bear market. He also agrees with McOrmand that staying calm in the face of Wall Street volatility is key.

“We’re cheering on the ETF business for sure. It’s doing what it’s supposed to do at this point. Going forward, I think [McOrmond’s] words of wisdom about being calm, sticking to your long-term model, is important. If you’re trading, make sure you’re efficient in your trading.

What should investors do in a bear market?

With the volatility in the stock market, these actions could be effective for investors. Investing in a bear market could be profitable with these strategies. Dollar-cost averaging is for risk-averse investors that want to remain steady in a bear market. Dollar-cost averaging means investing stocks at regular intervals at the same amount. This strategy can work effectively during a bear market. Investors put a certain amount into buying stocks. With a steady amount, there can be a pay-off during a bear market. If stock prices fall, your average cost can fall and investors can buy more shares of stocks.

Diversified portfolios would also be pivotal to investing in a bear market. Having a diverse mixture of stocks, bonds, and futures can help investors in a bear market. Futures can especially be an effective way to invest. Futures like the E-mini S & P 500 are one of the most trades indexes. Buying Treasury bills can be effective as well. The yields on 10-year Treasuries have skyrocketed 27.2 basis points in the past few days. Investors are likely investing in a perceived safety in Treasury bonds with the uncertainty of the stock market.

Another investment strategy is to invest in stocks with high dividends. Some stocks with high dividend payouts include Big Pharma company Pfizer(NYSE:PFE) and storage company Public Storage (NYSE: PSA). These stocks often give investors high dividends of at least 3%.

Another bear market investing strategy that is effective is simple patience. Because of the volatility in the market, it’s impossible to time when the Dow Jones will enter a bear market. Riding out the wild swings of the stock market is key to investing in a bear market. By just waiting out the bear market investors can profit. Even for passive day trading, thinking carefully before investing will lead to better investment decisions.

Some financial experts see buying opportunities in bear market

While many financial advisors are pessimistic about the current stock market, investor Bill Miller says the bull market is a great time to invest. The chief investment officer of Miller Value Partners said that the bear market can be advantageous for savvy investors.

“I think this is an exceptional buying opportunity. I don’t mean to put all the money in at once but I do think layering it in right now is the way to go,” said Miller.

Financial experts believe bear market will last if no pharma breakthrough

Many other financial experts believe that the bear market will last longer than expected. Paul O’Connor, head of multi-assets at Janus Henderson Investors believes there is a medical component to the Dow Jones recovery. He says that unless coronavirus infection rates slow, Wall Street will continue to be nervous.

“The missing fundamental ingredient for a sustainable recovery in risk appetite is some evidence that the growth of global Covid-19 infection rates is peaking. Clearly, we are not there yet,” said O’Connor.

Tom Essaye, founder of the Sevens Report, also thinks that innovations in medicine is key to helping the skittish stock market.

“Volatility is not over yet,” said Essaye.“We also need to see more progress on the pharma side of things and above all else we need the growth rate of the virus to peak in the coming weeks.”

John Hill, interest-rate strategist at BMO Capital Markets, said that the government’s response is key. He believes the policies implemented will affect the stock market.

“Unless the White House and Congress significantly disappoint with their policy response, there is room for the bearishness to extend,” said Hill.

When will the bear market end?

For investors who want to be more aggressive during this bear market, there are many options. However, it remains unclear how long this downturn will last. The stock market has gone through wild up-and-down swings over the last few weeks. The S &P credit rating agency believes that the U.S. is headed toward a recession.

“The increasing restrictions on person-to-person contact in Europe and the United States have sent markets reeling as risk-aversion rises and views on economic activity, earnings, and credit quality deteriorate sharply,” S&P said in the note.

No matter what happens in the bear market, investors will be closely watching Wall Street. They will monitor what stocks they should buy or sell. The massive sell-off is part of a cycle of bull markets and bear markets. As long as investors are patient and wait out this current crisis, they can find the best stocks, ETF’s, and futures to add to increase their portfolios.

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