Since the 20th century, the stock market has been influenced by several events. In the 21st century, some of these important events were the financial crisis, the oil price shock and many more. The disappointing start of the Hong Kong stock market in 2022 is due to negative news in the mainland property sector, which has been continuing for years, so how can traders survive these?
The first method is data analysis. The Hong Kong stock market was quite constructive and positive last year, and there is no sign indicating that it will be poor this year. By analysing the performance of the HK index, traders can stay away from short selling or singing put options to protect themselves. This information can provide a higher chance for investors to survive in 2022.
Secondly, using derivative products such as call options is another way for traders to increase their portfolio value and lower risk exposure at the same time. Derivatives, especially equity-linked contracts (ELC), which include total return swaps (TRS) and equity-linked notes (ELN), can enable business owners to gain more control over their assets and lower the risks of losses.
Thirdly, traders should trade during a bear market to increase their chances of survival. The number of stocks decreasing is much lower than those increasing, so profits from bull markets can stabilise funds for use in a bear market. Trading in a bear market does not always mean short selling since there are bullish traders who sell calls during a downward trend, which can reduce the risks involved.
Fourthly, diversifying a portfolio is another way for traders to survive. As more stocks have been decreasing in Hong Kong, it has become an excellent time to trade with other stock markets using derivative products such as options and futures. In this case, they can get the chance to increase their return on investment while controlling downside risks. For example, selling covered calls or selling puts against bullish positions in the US market during the recent week of the GFC.
Another method is trading over a short period because there are more opportunities when markets are volatile. From an economic standpoint, volatility means higher risks and higher returns, so traders should seize these moments since they can increase their chances of survival.
Hedging can also be a solution for traders to survive. In this case, they can use hedge funds that have a bear market as their investment strategy. These types of funds are not allowed to sell stocks short, but there is no restriction on buying call options during a downtrend and hedging using inverse exchange-traded funds (ETF) too. They will profit from the difference of option premium and ETF depreciation instead.
Since Hong Kong’s HKMA has been taking action against the Chinese mainland property market, you should avoid all investments related to this sector as it might cause huge losses too similar to the JPY crisis in 1998. In this case, trading using derivatives such as equity-linked contracts can help traders stay away from risks and increase their chances of survival instead.
Another method is the use of technical analysis tools to predict market changes. Although many investors believe that stock prices are purely based on supply and demand, this is not always true because traders also need to pay attention to interest rates, inflation risks, currency fluctuations, political risk factors etc. Using these tools together with data analysis for predictions will increase the chance of survival for traders.
Traders must use the above methods to increase their chances of survival in 2022. Traders should review their investment portfolios to identify the high-risk items that might cause problems in a bear market and avoid those as much as possible. In this regard, they can increase their chances of survival instead.