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ETF Trading Lessons From the Recent Stock Market Flash Crash on 6th May 2010!

As a stock trader or an ETF trader you must be wondering what in the world happened that day and how can you be careful to avoid such a nasty trading day. So let’s discuss what happened on that day and what lessons we can draw as a stock trader or an ETF trader.

Stocks were already having a bad day on the 6th May due to the debt problem and riots in Greece, elections in UK, credit freeze in Europe when matters went from bad to worse to catastrophic even for some blue chip stocks. Within a matter of few hours, DOW JONES index had lost something like 1000 points. But luckily the things came back to normal soon.

Now, ETFs can be traded just like ordinary stocks all day without any problem. But not on that day. As the stock market plunged, the liquidity soon dried out. When the circuit breakers in the New York Stock Exchange (NYSE) stopped the trading of certain stocks, ETFs based on those stocks plunged too.

Within minutes, stocks and ETFs were being sold from 50 to 90% discount. Let’s take the example of iShares Russel1000 Growth (IWF). This is a popular ETF with three millions shares roughly being traded daily. What this means is that it has good liquidity. But on 6th May before the stock market plunge, shares of IWF were selling for $49.70 then $44.23 and soon at $19.98. But hopefully when the market became normal, the prices of IWF ETF also returned to $49 per share.

So this stock market flash crash was not a real crash but it panicked almost all the market participants. Hopefully, the market was soon back to the normal. However while pondering over this brief stock market crash, the following lessons are very important and you should think over them;

1. Always use Limit Orders and avoid placing Market Orders.

2. Always think before you place the Stop Loss. Keep on updating the Stop Loss, as your stock or ETF increases in price. Otherwise, you have to sell your stock or ETF at a much lower price than you had wanted. One way to do that is to ue a mental stop loss. You can also use a Trailing Stop Loss.

Whatever, this stock market flash crash scared a lot of traders. Many experts are blaming computerized trading for such stock market flash crashes. You need to be careful as it can be repeated again!


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