What Will You Do If the Nifty Crashes 10.69% Tomorrow?

Apurva Sheth

Before you rush to your broker, I am not saying the Nifty will crash 10.69% tomorrow. I am merely proposing the question: What would you do if it did fall more than 10% in a day...on any day?

Before you reject this scenario as unlikely, let me tell you the Nifty has crashed more than 10% six times in the last ten years. Recently, it happened to one of the emerging market indices from the BRICS basket.

Brazil, Russia, India, China, and South Africa comprise the BRICS. Last Thursday trading was halted for thirty minutes in Brazil after its benchmark index, the Bovespa, dropped 10.69% within minutes of opening. The selloff came as new bribery allegations surfaced against Brazil's president, Michel Temer.

The crash was surprising for most investors as the Brazilian markets have been on a tear since January 2016. The Bovespa was up 87% since then, from a low of 37,112 to a high of 69,487.

But on Thursday, it took just twenty minutes for the index to move from 67,540 to a low of 60,314. It came as a rude shock to traders who've been making a lot of money in the rally. Most of them were caught unaware and didn't know what to do after the crash.

Bovespa Tumbles 10% in a Day
Bovespa Tumbles 10% in a Day

What if that happened here in India? What if the Nifty crashed more than 10% in a day? What would you do to protect yourself and make the most of the opportunity. Remember, there's an opportunity in every crisis. Read on to discover the four steps traders should follow after a sudden crash...

  1. Close all your losing trades

    If the Nifty fell 10%, then most stocks in the index would be in the red. Some would be down much more than 10%. The exchanges would halt trading for half an hour, and there'd be panic on Dalal street.

    Most people lose their ability to think clearly during a panic. And as the losses mount with every passing minute, they lose their composure. Stoplosses would already be hit, but you might not have had an opportunity to exit your trades. Exit them as soon as you can. This will protect you from further losses and anxiety. Once you have accepted the losses, you can relax and start with a fresh slate.

    Recommended Reading: A Traders Best Friend

  2. Keep your trades and investment separate

    When markets are crashing, you may want to get out of all the stocks you hold at any cost. But that's when you need to keep calm.

    Trading and investing both play a significant role in building long-term wealth. But it's very important to keep them separate. Investing for the long term helps beat inflation and build a retirement corpus. Trading helps you generate additional returns over and above your investments.

    If a stock is a long-term investment, and the rationale for investing is still valid, then you should continue to hold irrespective of the crash. On the other hand, if it's a trade, and the stock has hit its stoploss, then you should exit without fail.

    Recommended Reading: The Confused Trader

  3. Rebuild Emotional Capital

    Trading is a business. And every business needs financial capital. But emotional capital is just as important. If financial capital is the lifeblood of a business, then emotional capital is the soul.

    Emotional capital is what drives you every day and allows you to make appropriate decisions with your financial capital. When you suffer a major loss, you are bound to be running low on emotional capital. It's important to rebuild emotional capital before your jump back in the trading arena.

    Some people regain emotional capital within hours. Some take days or even months. How soon you regain emotional capital depends on your market experience and mental toughness.

    Recommended Reading: 6 Steps to Rebuild Emotional Capital

  4. Look for low-risk, high-reward trades

    Once you have regained your emotional capital, you can start looking for trading opportunities. Markets generally trade with high volatility and choppiness after major falls. If you can't handle it, then it's better to wait for a clear direction to emerge. But if you have the temperament, you can then look for some specific trading setups:

    • Stocks that have deviated sharply from their mean

      Stocks have a tendency to revert to their mean. When a stock has fallen sharply, it is at an extreme point and reversion towards the moving average is likely. Look for entry opportunities in stocks that have deviated sharply from their moving averages.

      Recommended reading: Finding Price Extremes

    • Stocks in strong uptrends

      After a sudden crash, you might find opportunities in stocks you always wanted to buy but couldn't because the risk-reward wasn't favourable. After a sudden crash, you can look for stocks that are moving in a rising channel and are available near the lower edge of the channel.

      Recommended reading: How Trend Channels Helped Me Pick Stocks This Diwali

    • Trading with options

      Markets are likely to be choppy. What may look like a reversal could turn out to be a pause before the downtrend resumes. This could lead to more losses if the market opens with a big drop the next day. One way to trade such markets is with options. You can buy call or put options depending on your view of the market. Here you can limit risk while keeping the scope for rewards wide open.

      Recommended reading: Limited Risk. Unlimited Rewards.

Nobody knows when the markets will crash but one thing is for sure boom and busts will be a part of the market cycle. Sooner or later markets will go through a downtrend and may even crash. That's when you can put this knowledge to practice.

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Market Notes

This Simple Indicator Can Pick Market Bottoms

We have been tracking an indicator for a long time now. In backtesting, this indicator has generated signals that have correctly indicated most market bottoms. The indicator is called the advance-decline (AD) ratio.

At Profit Hunter, we monitor various market indicators to have a broad view on the stock markets. The AD ratio is an important market breadth indicator we track.

The health of any market rally depends on the number of stocks participating in the rally. The more the stocks that participate, the healthier the market rally. This is where the AD ratio comes in. It helps us measure the health of the market by showing how many stocks are taking part in a rally or sell-off.

To gauge the strength of the index rally, we have developed this AD ratio signal. We backtested the signal over seventeen years of Nifty history. You can see the results in the chart below.

AD Ratio Signal over 17 Years of Nifty History
AD Ratio Signal over 17 Years of Nifty History

The blue dots on the chart are the point where we got the AD ratio signal. The returns below the blue dots are the twelve month returns after the signal. Out of 9 signals, only one generated negative returns. Others has effectively captured the major rallies in the Indian markets.

For example, we got a signal on 18 December 2008, when fear was at its peak. In fact, that was the exact bottom for the stock markets. The index rallied 67% from there in just one years' time.

We also got signals on December 2002, May 2005, and August 2006 from where the market rallied 50%, 81%, and 30% respectively.

The AD ratio signal was also generated on May 2014, which helped to capture a 14% rally.

The last signal we got was on 9 January 2017 when the Nifty was trading at 8,200. It's now at 9,350, up 14% in four months.

The signal has worked fantastically in the past. Next time, we will show you how this signal works. Stay tuned...

From The Market Wizards...

"Decrease your trading volume when you are trading poorly; increase your volume when you are trading well." - Paul Tudor Jones

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9 Responses to "What Will You Do If the Nifty Crashes 10.69% Tomorrow?"
Jatin
26 Aug, 2017
OkLike 
Dhananjay Patwardhan
01 Jun, 2017
Pl. find below 4 topics which I came across to on the net. Pl. go thru by copying the each topic on net. Warren buffet indicator predicts stock market crash in 2017 Stock market sell bubble Buffet 55 million gamble bet us collapse warns cia economist Mystic predicts exact day world war 3 is going to begin This is for serious consideration since the tone in the market appears to be negative and fearful. Dhananjay PatwardhanLike (1)
Dhananjay Patwardhan
28 May, 2017
The present scenario in the Market and few of the Articles I came across to suggest that the said crash is very imminent and may take place any time from today to end of Nov.2017. I have sold my shares where there is surplus and sitting on the cash for finding new opportunities to invest at lower rates. As far as Mutual Funds ,I have shifted all my units to Arbitrage Fund and waiting for lowest NAVs of my earlier funds for reinvestment after crash at reduced rates. Would like to have your views. D.V.Patwardhan Like 
Anuj Kumar
26 May, 2017
One of the rarest articles i have come across on equity investing. The title in itself is so thought provoking. But at the same time the article is not hollow it has so much meat to drive home.the point.Like 
ranjit kumar baruah
25 May, 2017
In case of a nifty crash of 10.69%, I would like to sell my shares except those long term ones.Like 
ranjit kumar baruah
25 May, 2017
In case of a nifty crash of 10.69%, I would like to sell my shares except those long term ones.Like 
Sudhir Mahale
25 May, 2017
In similar lines of AD ratio I some times use ratio of bid quantity to offer quantity. If the stock is going up but ratio is small then it is going to fall. It indicate some one is manipulating the market. In that case I will not buy it. If price is going down but ratio is high means there is lot of interest in the stock. That can be entry point provided all other criteria are favorable. I would like to have some advice in this approach. Like 
Sudhir Mahale
25 May, 2017
As a small trader I can not do anything at the moment but to hold on. Such a major crash happens when FII offloads in a bulk. I will look for a reason. It may be some rumor. In that case Hold and try to find a pattern sector wise. If it is due to some phenomenon like start of war, then whole world is in same boat. Sell and get out at first available opportunity. If due to some localized event, then market will be volatile. Buying options as suggested will be a good idea. Like 
malhotra satendranath
24 May, 2017
An excellent article by Apurva! And so very timely as well. And there is so much of support reading material. Wish this had been mailed earlier. All the same it's great and congrats to Apurva. Keep the good word flowing our wayLike 
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