When the Market Panics

Trying to trade based on the whims of Vladimir Putin, a Ukrainian separatist armed with a rocket launcher, or Hamas terrorists is a fool's game.

This article is published with permission from InvestmentU.com.

Trying to trade based on the whims of Vladimir Putin, a Ukrainian separatist armed with a rocket launcher, or Hamas terrorists is a fool's game.

Sure, sometimes the actions of a madman overseas will disrupt the markets and hurt your positions. But other times, a geopolitical event will help your stocks. It's just that the violent ones that crush your positions are the more memorable ones.

So here's how you trade geopolitical events: You don't.

You trade based on your discipline—whether you're a technical analyst who examines price supports and resistance on the charts; or if you trade based on momentum, valuation or throwing darts at The Wall Street Journal. Whatever works for you, keep doing it and ignore the newspapers and TV.

The most important thing is to make sure your position sizes are appropriate so you make good money when things go right and you don't lose much when they don't.

Additionally, if you have trailing stops in place, you'll minimize your losses and protect your gains when a geopolitical event causes the markets to shudder.

Sure, you could get shaken out of a position when markets tank due to troop movements across the globe. It's frustrating when your stock gets stopped out only to rally the next day or week.

But you always remember those and forget all of the times when your stop did exactly what it was designed to do, which is get you out before the stock falls lower still. After a few days, once you're satisfied that it was a good exit, the stop is relegated to the mental trash bin. In other words, you never think about it again.

Buy panic

About the only time you should even be thinking about trading geopolitical events is if a sudden sell-off creates an opportunity to buy a fundamentally strong stock at a reduced price.

Earlier this year when Russia first invaded Crimea, the Russian stock market sold off hard. At that point, it was down nearly 60% from its highs and had plunged 16% in less than a month.

When geopolitical events cause that kind of panic in the markets, that's when I want to buy.

I found CTC Media (Nasdaq: CTCM), a healthy Russian media company with a yield of over 7%, had fallen 33%—more than twice the Russian market. Even after the latest 10% slide in the Russian market, due to the downing of the Malaysian airliner, the stock is still up 18%.

(It's currently rated a hold, so I don't suggest you buy it now.)

The point is, about the only way I'll trade a geopolitical event is to find strong assets that panicked investors are dumping with no thought as to their future value. The only thing they can see or deal with is their own fear. That makes for excellent opportunities for the rest of us.

Of course, it's not easy to find the bottom of such panics, so you need to have your stops in place and be patient. Things don't always turn around quickly.

But if you're buying good value, it should work out in the end, regardless of what you hear on the evening news.

Marc Lichtenfeld is the chief income strategist at Investment U. See more articles by Marc here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.