Black Monday and Crash of 1987: Chart & Learnings

• In October 1987, stock markets were booming and enjoying a bull run of five years.
• The stock market crash of 1987 was so much catastrophic that it caused Dow Jones’s 1987 chart to fell all of a sudden.
• The Dow chart 1987 faced the worst fall of history by 22.6%. The S&P 500 fell by 20% and future markets dipped by 29%.
• And, the stock markets from all over the had to suffer fall between 20% to 40%. The result was the loss of $1.7 trillion worldwide.

Monday, October 19th, 1987, was a horrible day for the world’s economy. Within the time span of 24 hours, stock markets in Asia, Europe, and the US suffered plummet. That day was a black day and is known as Black Monday in the books of history. It was indeed Black Monday because it was the worst stock market disaster in history. It was so disastrous that the world forgot about the Wall Street Crash of October 28, 1929.

Stock markets suffered a decline of up to 23%. The Dow Jones 1987 charts fell by 22.6% in the US. That was almost double, 12.8% fall of Dow charts of 1929. 34 years have elapsed since but there are many questions that still remained to be answered. 

What actually happened on Black Monday of October 1987? 

In October 1987, stock markets were booming and enjoying a bull run of five years. The global economy was flying after recovering from the recession. No one knew that a horrible day was hovering around and was ready to strike as hard as possible. Finally, the day came with all its darkness and stock prices began to crumble with no obvious reason why. All the market participants across the globe were just spectators and could do nothing about it.

As Black Monday’s sun begins to travel, more panic begins to settle in. Everyone was trying to limit losses and thus a herd behavior led traders and institutions to react to price movements. This herd behavior only made the situation worse as the fall of stock prices became more drastic. There was the rule of selling orders and trade order updates got more and more slow and unreliable. All the market participants acted impulsively and irrationally. 

When all was done and dusted, the Dow chart 1987 faced the worst fall of history by 22.6%. The S&P 500 fell by 20% and future markets dipped by 29%. And, the stock markets from all over the had to suffer fall between 20% to 40%. The result was the loss of $1.7 trillion worldwide. It is hard to believe now but it did happen. The Black Monday of October 1987 is a great learning tool for the world to try to mitigate the impact of such sudden economic falls. 

Who came to the rescue? 

The stock market crash of 1987 was so much catastrophic that it caused Dow Jones’s 1987 chart to fell all of a sudden. 1987 stock market crash charts were so horrible to have a look at that the Federal Reserve had to act quickly. First of all, it publicly announced that it would support the liquidity of the market. Then it went on to drop the federal fund rate to 7 from 7.5% and also lowered other short-term interest rates. Those steps proved crucial to extend liquidity. 

The Federal Reserve also encouraged banks and other borrowers to operate in cooperation. It also advised working more freely than usual with their clients, particularly all stockbrokers and dealers who were severely affected by the stock market crash of 1987. Fortunately, the swift and immediate steps of the Federal Reserve, also the financial backing, proved extremely helpful in recovering stock markets in a few coming weeks.

The causes of the stock market crash of 1987

No one, not even the gurus of the stock market, knows what were the exact causes of the stock market crash of 1987. Not a single theorist has ever claimed to answer the mystery of why did Dow Jones 1987 chart fell in less than 24 hours. However, there are a few probable causes that led to the biggest stock market crisis in living memory. 

A long bull trend overdue for a correction

As we have discussed earlier the stock market was flying and that strong bull trend in the market was overdue for a big correction. The stock market never experienced a single corrective retracement since the beginning of the bullish trend in 1982. Stock prices were going higher and higher, rose by 40% in the year of crisis alone. Some theorists believe that such a long bullish trend was the cause of Black Monday as it was due for a correction. 

Programed trading

Programed or computerized trading is another cause of the crisis according to some theorists. The use of computerized trading enabled brokers to trade in bulk orders and quickly. Software programs were designed to trade automatically according to predefined stop-loss levels. On Black Monday, as the prices begin to hit stop-loss levels, computer software began to sell out positions. Thus, the pace of selling continued to accelerate and caused prices to continue to fall. 

Portfolio insurance

Portfolio insurance was a relatively new phenomenon in 1987. It was the practice of hedging stock portfolios by taking short positions. The portfolio insurance strategies were adopted by large institutional investors. They had a strategy to increase short positions on futures automatically if stock prices declined.

On Black Monday, what was happened in computerized trading also happened here. Large investors began to sell short S&P 500 futures as the stock prices began to fall. Futures selling put extra selling pressure on stock markets and this chain of related pressures led to unimaginable crises all across the world. 

The wrap-up

The Black Monday crisis was different from the crash of 1929 and the most recent 2008 crisis. It was very brief and short-lived. 1987 Dow chart suffered a loss of 508 points and soon recovered 288 points within just a few weeks. Until 1989, the stock market had recovered all the losses and a new bull trend began. 

There are many factors that combined to lead to the stock market crisis of 1987. However, the exact reason for the sudden downfall of the stock market, 1987 stock market charts, and 1987 Dow charts are unclear. However, there a lot of lessons to be learned. The phenomenon of “circuit breakers” was soon introduced. Its purpose was to avoid panic in the market because of which traders impulsively and irrationally began to sell their stocks. Circuit breakers will give traders a break to be calm and make rational well informed decisions. Finally, we may not know exactly what happened on Black Monday but we have covered quite a distance now and have taken some precautions to avoid such situations in the future.

Money management & position sizing: The key to long-term profitability

There is no trading strategy in the world that guarantees us success every time. No matter how careful and vigilant we are in our trading, there are things that are out of our control. If we carefully analyze a company and follow market trends, we cannot claim to be successful every time. Let us suppose, prices suddenly reverse and move in the opposite direction because of a news event, what can we do? Nada. We can do nothing about it apart from, guess what? Risk management and money management.

• Money management is crucial for a trader’s trading capital and long-term trading goals.
• Those strategies are protective shields that save you from making devastating mistakes. 
• Money management is all about maximizing profits while minimizing losses.

What is money management? 

Money management is a technique to manage trading capital effectively, minimize losses, maximize gains, and also grow trading money. Money management is often confused with risk management even though both are different concepts. Risk management is a technique to manage and minimize your risks to protect your money from adverse market conditions. Money handling techniques just focus on protecting and keeping intact your trading capital. 

Money management strategies

In simplest of words, money management strategies are defensive approaches. The purpose of a money handling strategy is to protect funds to make sure that you have funds intact to trade the next day. Money management strategies involve quantifying your risk per trade, establish a risk/reward ratio, position-sizing, and only then enter a trade.

1. Quantify your risks

There are multiple ways to quantify your trading risks but the following two are the easiest but important methods.

2. Fixed 2% rule strategy

The 2% rule money management strategy is based on your account size. It requires traders not to exceed your position size above 2% of account size. 2% rule strategy proves very instrumental for new traders and for those who have limited funds. Although it is a conservative approach, it can keep you in the trading while you continue to learn and gain experience to play on a high level. 

3. Fixed sum strategy 

Fixed sum money management strategy revolves around fixing an amount to risk per trade. For example, you have $10,000 in your account and fix an amount say $500 to risk per trade. It is a very easy rule as you know how much you have to risk on each trade. However, it has a major drawback that it doesn’t consider an increase or decrease in your trading balance. If you go on a winning streak, your balance substantially increases but risk per trade remains the same. You will miss out on extra gains if you don’t adjust risk per trade. Similarly, you will be risking higher if the balance decreases because of losses.

4. Risk/reward ratio

After deciding risk per trade, you need to decide how much profit you can aim for, and use this to set take profit order. This is the decision that depends on your trading strategy and your personality, especially your attitude to risk. A risk/reward ratio determines how much profit you aim at the expense of risk you are willing to take. Most people think that the risk/reward ratio of 1:1 is safe. Well, it is but the profit potential is also very low. It is always good to have a higher ratio as you are in trading to get profits. Remember the adage, “high risks, high rewards.”

5. Position sizing

Position sizing is another most important step in your money handling strategy. It means the amount of money you invest in each trade. It is extremely important in money management because position size decides how much can you gain and how much can you lose on each trade. In other words, you are in full control of things with the help of position sizing.

Position sizing is a crucial tactic that helps you minimize risks and also saves you from total wreckage if you fail in your trade. It allows you to cover your loss on one or a few trades from other profitable trades. That means position sizing is in fact a diversification strategy. Follow the following steps for position sizing.

• Determine the amount of your trading capital
• Quantify your risks
• Determine your risk per trade with the help of stop-loss. You should place stop-loss 5% to 8% below your purchase price
• Determine how many shares you can buy
• Determine position size
• You can determine the size of your position with the help of the following easy formula. 

Number of shares = Risk per trade percentage × trading capital / Risk per share ($)

Final thoughts

Money management is crucial for a trader’s trading capital and long-term trading goals. If you don’t manage your money carefully, you won’t have money for trading in the near future. Thus, money management strategies are crucial for traders. Those strategies are protective shields that save you from making devastating mistakes. 

Money management strategies, if applied effectively, have the potential to manage your limited resources to achieve big profits. After all, money handling is all about maximizing profits while minimizing losses. Money management strategies are pillars of your trading building. Why so? Because they help you grow your money through maximizing profits. Do you want to grow your capital? Do you want to trade for a long time? Pay utmost attention to money management and money management strategies to realize your aims and dreams.

Risk management: The most important factor to profitability

Losses are inevitable in trading and no trader not even the most successful traders can make 100% winning trades. That is why risk management is paramount to keep manage risks carefully. 

• Trading is a very risky game that requires you to be disciplined in each aspect.
• If you want to remain in the game for a very long period of time, you need your capital intact.
• Traders often neglect money management and risk management.
• Only after incurring huge losses and facing frustrations, traders turn to money and risk management. You can cut that learning curve short and avoid all the inevitable consequences by only turning to risk management.
• There are multiple risk management techniques such as the 1-percent rule etc. that you can choose to keep your losses minimum, keep your capital intact, and remain in the game for the long term. 

Risk management trading techniques involve placing strategies to tackle adverse trading conditions. When you limit your trading positions, your overall remains minimum even if an adverse market move or series of losses do happen. It also saves your trading funds so that you can recover incurred losses through profitable trades in the near future. 

Risk management trading works on a simple principle. It measures the extent of your potential losses in comparison to profit potential on each new trade. Traders who don’t exercise proper risk management are prone to making huge losses for too long. 

Why risk management is must in trading? 

Professional traders are well aware of the importance of risk handling in trading. They know that even the tried and tested strategies can leave them vulnerable to risks because of:

• Series of consecutive losses
• Occasional huge losses as a result of major events such as news event
• Market conditions are ever-changing and you cannot be 100% sure that a strategy that was successful in the past will continue to be successful in the future

Therefore, risk management is a must in trading. Without proper risk handling techniques, events like the above lead you to:

• Loss of a major portion of your capital
• Incur losses that cannot be recovered given your overall financial position 
• The forced exit of a trading position at the wrong time because of lack of liquid funds to cover margin
• An extended period of time just to recover incurred losses and restore the level of your trading funds

What are the most impactful risk management techniques? 

Risk management must be an indispensable part of your overall trading strategy. Without it, you cannot even expect to protect your capital. If you cannot protect your trading capital, you will not be able to take profits and remain in the game over the long run. 

There are various different techniques that prove instrumental in risk management. The following are the most common techniques you can employ to manage your risk.

1. Risk/reward ratio 

Measuring the risk/reward ratio is one of the best risk management techniques. Once you identify an entry signal, decide your stop-loss level first and then profit order. Measure the risk/reward ratio after identifying reasonable price levels for your trade. Just ignore the trade if the risk/reward ratio doesn’t match your requirements. Moreover, it isn’t a good idea to enlarge the take profit order or shorten your stop-loss level for a higher risk/reward ratio. Remember that profit is always uncertain. The risk is the only factor that you can control. Thus, manipulated risk/reward ratio is detrimental to your trade success. 

2. Position sizing

Dynamic position sizing is another risk management technique that professional traders employ. Trading is a game that relies heavily on chance. You might have observed that different trade setups and strategies give different outcomes because of different win rates and risk/reward ratios. That implies that you need to vary your position size on each setup and strategy. If the trade setup has a low win rate, reduce the size of your position and vice versa. 

3. Diversification

Diversification is the most basic risk handling technique. If you rely on a single instrument in order to make profits, you expose yourself to excessive risk. Conversely, when you carefully diversify your portfolio, you protect yourself from big swings in a single instrument. 

4. Stop-losses

The use of stop-loss to protect your trades from sudden changes in the market is an old but effective risk management technique. It is an extremely useful technique that helps you avoid total destruction when prices turn against you. Stop-losses are calculated in advance to find out the maximum loss you are willing to incur on a single trade if prices move against you. It helps you avoid losing more money. That means stop-losses are a good shield for traders to protect their capital in a rapidly changing market.

5. One-percent risk rule

1-percent risk rule is another risk management technique that pros follow. According to the 1% risk rule, traders should never risk more than 1% of their capital in a single trade. When you risk less, your losses are also less than you can afford. This risk management technique suits all those traders who have low trade capital. Traders with high trading capital often risk 2% or higher because they can afford it. Thus, the 1% rule is a good technique for keeping your losses under control. If you don’t follow the 1-percent risk rule, it means you are exposing yourself to incurring big losses and substantial loss of capital.

Final thoughts

Trading is a very risky game that requires you to be disciplined in each aspect. Risk management is a key aspect of trading and it demands utmost discipline. If you want to remain in the game for a very long period of time, you need your capital intact. If you don’t pay attention to risk management, you incur losses and your capital begins to evaporate. 

Unfortunately, traders often neglect money management and risk management. Although these are crucial aspects but never get enough attention. Only after incurring huge losses and facing frustrations, traders turn to money and risk management. You can cut that learning curve short and avoid all the inevitable consequences by only turning to risk management. There are multiple techniques such as the 1-percent rule etc. that you can choose to keep your losses minimum, keep your capital intact, and remain in the game for the long term. 

Trading As A Business: All You Should Know To Trade as a Pro

• Professional traders do not consider trading as a hobby.
• When you take trading as a business, you develop a proper plan that becomes your stair to reach heights of success.
• Also, you prepare yourself for the uncertainty, risks, losses, and stress.

We often find professional traders advising us to treat “trading as a business.” Most of the amateur traders and investors consider this a meaningless phrase and continue to do it in their own way. Is this a good approach to neglect the advice of the best traders across the globe? No, it isn’t. Those who don’t pay attention to valuable pieces of advice, often find themselves on the wrong end. 

Every new trader who set foot on the trading island wants to emulate George Soros and other successful traders who made their way to success against all odds. What most of those newbies forget that even the most successful traders had a roller coaster ride to success meeting small successes as well failures. It was their professional excellence and ability to learn from mistakes that kept them going. What is the top traders’ take on trading? They take trading as a business and deal with it accordingly.

Why it is important to take trading as a business? 

Trading is a business that is why you invest money in it. No one can take it as a hobby and aspire to achieve success. Only those who take trading as a business can aspire to scale the heights of success. Why? Because they adopt a business’s approach in their trading and work for long-term success. Thus, you also need to have a similar stance to trading in order to remain within the 15% threshold of successful traders. 

Why 85% of traders fail?

Stats illustrate that only 30% of companies remain in the market after 10 years of inception. 70% of companies fail to complete 10 years. Trading stats are even more bewildering. 85% of traders fail in the trading profession and only 15% taste the fruit of trading. The reason is, trading is a profession full of turns and twists. You always need a proper approach in trading to achieve success. That approach is taking trading as a business. 

How you can take trading as a business and what are the requirements? 

If you enter the world of trading to make crazy money, your chances of success are minimal. Passion is the driving force that drives people to succeed in any profession and trading is no exception. You have to be passionate about this profession to cope with the inevitable difficulties like losses, setbacks, and failures. If you think you are passionate about trading, then enter the world of trading but to take it as a business as trading is business itself. Let us see what do you have to do if you take trading as a business and what are its requirements. 

Sufficient funds

Companies that fail during their first few years of inception fail because of a lack of profits and insufficient funds. On the other hand, all the successful companies have sufficient funds to replenish their resources to make profits. That is what trading requires. You need to have sufficient capital in order to cover expenses and compensate losses. Moreover, you cannot forget about living expenditures as well. Therefore, it is imperative to have sufficient funds to replenish your trading account. If you trade with money you can’t afford to lose, trading isn’t for you until you have sufficient capital to trade while meeting day-to-day expenses.

Knowledge, competence, and experience

According to an old adage, knowledge is power. If you have the knowledge, you have odds of success in your favor. The knowledge of trading and the world of stock markets is absolutely imperative. Then the skills aspect is a real issue in trading. You cannot expect to achieve success when you don’t the skill set required. Finally, experience is the key to success in trading. Therefore, learn, learn, and learn to develop skills and gain experience. Perhaps, a demo account will do the trick for you.

Realistic goals

Dreams are elusive and have nothing to do with reality. If you set goals based on your dreams, you cannot achieve them and the result is stress and disappointment. In order to avoid it, you need to set realistic and achievable goals to keep your morale high.

Trading plan

If you start a business without a proper business plan, you are doomed right from the start. Not only do you need to have a proper plan but plan within a plan to objectively assess the efficiency of your plan. Similarly, trading isn’t trading without a proper trading plan. A trading plan with all the necessary parameters for making decisions is absolutely imperative for successfully trading. Moreover, an objective assessment of a trading plan is as important as the trading plan itself. A deep analysis and assessment enable you to find out your weaknesses and what went wrong in losing trades. You also find out your strengths and strategies that led to successful trades. That’s how you improve on your weaknesses and capitalize on your strengths. 

Looking at the general picture 

Businesses that ignore the general picture and don’t bother about knowing changes that can negatively affect business get hit. Those who keep a wide spectrum in front, know the changes taking place in the industry, rules and regulations, business environment, etc. take appropriate measures to tackle those issues. Conversely, those who never see it coming to fail to take necessary steps that prove costly. The same is for the traders. They should look at the wider context and see, even predict, what is coming and what is needed to cope with it.

The final words

Professional traders do not consider trading as a hobby. They pursue trading as a business because, for them, trading is a business. A number have traders have incurred huge losses for taking trading lightly. Trading is a difficult endeavor that requires a lot before letting you taste the fruit of success. When you take trading as a business, you develop a proper plan that becomes your stair to reach heights of success. Moreover, you prepare yourself for the uncertainty, risks, losses, and stress. That is why professional traders emphasize that trading is a business. Thus, take it as a business and act accordingly. Otherwise, prepare yourself for failure and regrets.

How To Track Your Trading Performance: Guide & Best Metrics

How do you measure and track your trading performance? What is the best yardstick that can help you track trade performance? And, how do you know how good you are as a trader? 

Good? Better? Best? Mediocre? Or bad?

• Monitoring trade performance is an important element of trading activity.
• There are hundreds of trading system performance metrics but you can use a few most important metrics.
• It is important to utilize percentages and ratios to track trade performance to get a complete picture of your performance.

“How much money I am making” is the most obvious and clear-cut answer of most of the traders. Sure, money-making is the objective of trading and there is no purpose of trading if we don’t make money. But, the problem is money-making and profits are quite blunt instruments in terms of advising us where and how to be better? They cannot pinpoint where is room for improvement in our trading practices. The best way to track trading performance is to score how we are performing in different areas, find out our strengths, and get to know our weaknesses. And, that is how we can make changes in our trading practices as well as profitability. 

Understand the trading performance first

Trading performance, how to track and monitor trade performance, and how to improve trade performance is the most talked about topics in the world of financial markets. Why so? Because tracking and monitoring trade performance are as crucial for your trading as breathing is for your life. 

So, we know these are important factors to look at but what exactly is tracking trade performance? Monitoring trade performance is a process by which you can monitor and evaluate different trade-related metrics to track your current trading performance and then direct your efforts to optimize it for better output and profitability. 

Although there are hundreds of trading system performance metrics that you can use to track trading performance, only a few of them can do the job with perfection. Using a few trading system performance metrics helps to keep it simple but impactful. You need to focus on the most relevant factors that provide the most insight and help us achieve the best results. 

Most of the traders, despite the importance of monitoring trade performance and trading system performance metrics, overlook tracking and monitor performance. They face the consequences and miserably fail in their trading in the long run. In a nutshell, you cannot underestimate the importance of monitoring and tracking trading performance as it eventually leads you to improve your weaknesses and the highest possible levels of profitability.

It is rightly said that anything that gets improved when measured. Some amateur traders think that tracking trading performance is a useless and tedious endeavor. Conversely, professional traders always monitor trading performance and consider it crucial to their trading success.

What exactly do you need to monitor trading performance? 

Data! It is the most important thing in the world of trading. Data collection is some task and you have to work hard to collect data. There are two main ways through which you can collect data. The first method is rudimentary and non-technical as you manually input all the data in a simple Excel worksheet, Google sheets, etc. The important data include entry and stop price, average win/loss, target price, etc. The second method is more technical. It involves using specialized programs like journal software. Those specialized programs can work in integration with the platform of your broker or as standalone software. The second approach is a better option because the broker’s platform automatically transfers all trading data into your trade journal software. That means it relieves you from manually entering data and also helps boost your trading performance. 

Important trading performance metrics

There are hundreds of trade-related metrics but you should keep it plain and simple. The following are the most important trading performance metrics that can help you track trading performance in an impactful way.

Total number of trades

A total number of trades is an important measure that helps to measure many other important metrics. It will let you know how many trades you did with your trading strategy. A total number of trades help you analyze whether you trade too much, too less, or just the right amount of trades.

Win percentage

Win percentage is an important metric when tracking trade performance that reveals trades resulting in profitable outcomes. You can compare the win percentage with the average win amount to the average loss amount ratio. In most trading systems, when the win percentage is higher, the average win amount will be less and vice versa. 

Largest winning trade

The largest winning trade is a crucial metric for you when you rely on a few big wins to contribute to your overall return. However, this metric isn’t always significant. 

Largest losing trade

The largest losing trade is important in the sense that you can incorporate it into your risk management strategy. It will help you significantly improve your stop-loss or any other risk management techniques. 

Average time in trade

Average time in trade reveals the average holding period of your trades. It is an important metric because you can analyze whether you are holding too long that leads to losses or holding too short that cuts your profits. 

Maximum drawdown

A maximum drawdown is a measure that shows the largest dip from peak to the valley during your trading period. It indicates how much loss you have incurred from a prior market peak. It is an important measure you can utilize to improve your risk management techniques by knowing the maximum drawdown level of your trading strategy. 

Profit factors

Profit factors are also important factors while tracking trade performance. Keep in mind, profit factors alone aren’t enough and don’t contribute much to your overall improvement as a trader. However, they provide a quick picture of the profitability and viability of your trading strategy. Net profit figures, in particular, are more important stats because they are a realistic snapshot as they give figures excluding all related costs including commissions.

Keep your monitoring process simple

Once you have all the data collected, it is straightforward to track trading performance. You can judge right away what you are doing right and where is room for improvement. Moreover, the process of monitoring trade performance is highly personal. It also heavily depends on your trading methods and strategies. If you want to make the judgment of your trade performance more plain and simple, you can make data as visual as possible through techniques like charts. 

Regardless of your approach to monitor trade performance, it is important to keep the process as simple as possible. You should make this process easy that can be completed in a matter of minutes. If your approach is complicated or you are not comfortable with the approach, the chances of impactful tracking of performance are significantly reduced.

The warp-up

Monitoring trade performance is an important element of trading activity. You cannot overlook its importance like amateur traders and see how professionals value it. There are hundreds of trading system performance metrics but you can use a few most important metrics. It is important to utilize percentages and ratios to track trade performance to get a complete picture of your performance. Simply looking at profits and winning amounts don’t provide the whole picture. However, it is also important to keep your tracking process as simple as possible to make it less tedious but highly impactful.