Boom and crash trading strategies have been used for decades to generate more profits from the markets. This article will teach you how to create a boom and crash trading strategy that can be applied to any forecasted market event. These five steps include identifying opportunities, understanding your risk tolerance, determining your profit potential, deciding when to enter the trade, and calculating the profit or loss of your trade. Let’s get started!
Identifying opportunities
It’s important to identify opportunities that are most likely to be profitable. This includes identifying the best time to enter the trade, what type of trade to execute, and how much money you can risk on the trade.
For instance, if you predict a market crash in the near future you might want to sell short stocks. If you predict a boom, or increase in price, you might want to buy stocks at their lowest point.
Understanding your risk tolerance
Knowing how much risk you are willing to take is key to your success in the markets. If you are uncomfortable with the amount of risk involved, then this strategy is not for you.
{{{Screenshot of an example “Risk Tolerance Quiz” on Investopedia}}}
The first step of any trade is identifying your risk tolerance level. This is what will determine the amount of profit potential, as well as your likelihood of winning or losing money on any given trade. Remember, if you decide to accept more risk, there will be a higher potential for more return on your investment.
Determining your profit potential
The first step to creating a boom and crash trading strategy is determining your profit potential. Knowing the maximum profit that can be made on a trade will allow you to determine if it’s worth taking the risk. For example, let’s say you have two proposed trades. One of them has an unlimited potential for profit but also has a very high risk. The other has a more manageable risk but only a small chance of making money. What would you choose?
Since the potential for higher profits is attractive, you may want to take the riskier trade with an unlimited upside. But if your desired level of return is low, then it might not be worth the risk associated with taking that trade. This level of return may depend on your individual needs or goals in life, or it could even be dictated by what your risk tolerance allows you to handle financially.
Deciding when to enter the trade
The first step to building a boom and crash trading strategy is deciding when to enter the trade. This is based on the forecasted market event. It’s important to remember that you need to find out what your risk tolerance is before you can calculate your profit potential.
Calculating the profit or loss of your trade.
After you’ve identified opportunities, understood your risk tolerance, and determined your profit potential, it’s time to decide when to enter the trade.
If the price has already risen past the expected peak price (or if it’s about to), then your best time to enter is when the price is at its peak. If the price hasn’t risen past its predicted peak yet, then your best time to enter would be ahead of schedule before the anticipated rise.
After you’ve purchased a position, you’ll need to calculate how much profit or loss you’ve made from it. This can be done by subtracting your initial investment from the current value of your position. For example: If you bought a stock at $50 and it rose up to $60 before falling again down to $48, then you’ll have a total profit of $12 ($60-$50=$10-$48=$12).
