Translate the below html to English, keep format html, the result is not in markdown code and not break line, convert standard decode before translate: 株価暴落時にどうすればいいのか？「下がったから買うのは絶対にダメ」 translated content: What should you do when stock prices crash?
The stock market crash is a highly stressful experience for investors. Yet, calm judgment is required even in such situations. You may hear the advice “Don’t buy just because prices have dropped,” but why is that?
In this article, we will explain in detail, with concrete examples, why it is dangerous to hurry to buy during stock price crashes.
We will also consider it from the perspective of FX trading.
1. Risk like grabbing a knife
Buying while prices are plunging is often described as “grabbing a falling knife.” During a crash, prices are likely to drop further, and misjudging the timing of a purchase increases the risk of substantial losses. The same applies to the FX market; making careless trades during a currency’s sharp decline is very risky.
Concrete example:
The 2008 Lehman Brothers collapse: In September 2008, the bankruptcy of Lehman Brothers caused stock markets worldwide to plunge sharply. Many investors thought “prices have fallen, so I’ll buy,” but prices continued to fall afterward, and losses expanded. In the FX market as well, the USD/JPY fell significantly, and many traders incurred losses.
2. The chain of panic selling
When stock prices are crashing, investors’ psychology becomes unstable, and panic selling often occurs. In such situations, even if there is a temporary rally, another decline is likely to occur. In the FX market as well, panic selling can cause substantial fluctuations in currency pairs.
Concrete example:
The COVID-19 shock of 2020: At the beginning of 2020, the COVID-19 pandemic spread, and stock markets worldwide collapsed. Many investors engaged in panic selling, and even as prices plummeted, some tried to buy hoping for a bottom, but unstable conditions persisted and further declines were common. In the FX market too, risk-off movements caused the yen and the dollar to surge, leading to large fluctuations in many currency pairs.
3. Worsening fundamentals
Stock price crashes do not only reflect market sentiment but can also reflect a deterioration in a company’s fundamentals (underlying financial conditions and the economic environment). In such cases, it can take a long time for a company’s performance to recover, and there is a risk that prices will fall further.
In the FX market too, changes in economic indicators and interest rate policies affect currency values.
Concrete example:
Slump in the energy sector: From 2014 to 2016, a steep fall in crude oil prices caused a substantial drop in energy sector stock prices. Some investors thought “prices have fallen, so I’ll buy,” but prolonged oil price weakness worsened the financial health of many energy-related companies, delaying price recovery. In the FX market, resource currencies (for example, the Canadian dollar and the Australian dollar) were affected.
4. Reassessing your own risk tolerance
During a crash, it is important to reassess your risk tolerance. Making reckless buys when you cannot think clearly increases psychological stress and can lead to worse decisions.
In FX trading as well, high-leverage trades carry especially high risk.
Concrete example:
Failures of individual investors: Many individual investors think “now is the chance” when prices fall and take on risk by buying, but in reality prices often continue to fall, resulting in large losses. Particularly for beginners, inadequate risk management makes reckless buying during crashes very dangerous. In FX trading too, excessive leverage reduces tolerance to market fluctuations and can lead to large losses.
Conclusion
Buying carelessly in the middle of a stock market crash is an extremely risky move. Various factors, including market instability, worsening company fundamentals, and panic selling, influence these markets.
The same risks exist in FX trading, where calm judgment is required.
During a crash, it is important to pause, re-evaluate your risk tolerance, and act cautiously. Avoid reckless buying and carefully assess market trends, which is the path to long-term investment success.
