Crisis Trading: Expect the Worst and Reassess Later

A Trader’s Guide to Crisis Trading

With an update on the Trump Tariff Crisis

I’ve traded through many market crises, both financial and geopolitical, and one pattern remains consistent: markets initially price in the worst possible outcome before gradually reassessing the real risks. This is the essence of crisis trading.

Whether you’re a retail trader or managing institutional capital, trading during a crisis is not just about survival. In times of extreme volatility, it’s your ability to manage risk and stay disciplined that determines whether you live to trade another day or suffer losses that could take years to recover. As the famous adage goes, “Markets can remain irrational longer than you can stay solvent.”

Another phrase to remember: Expect the worst outcome first, then reassess later.

What Is Crisis Trading?

Crisis trading refers to the strategies traders use during periods of major market instability, usually triggered by unexpected geopolitical events, economic shocks, or full-blown financial collapses.

These are not ordinary trading conditions. Volatility spikes, liquidity often dries up, and emotional reactions to news dominate price action. During such times, conventional technical analysis or fundamental analysis often breaks down. However, these conditions also present opportunities if managed carefully.

Why Traders Should Expect the Worst During a Crisis

In a crisis, markets don’t wait. They react instantly, often irrationally to breaking news. By assuming the worst-case scenario, traders remain alert and avoid being caught off guard.

History is filled with market shocks that drove this point home:

• Nixon’s removal of the gold standard in the 1970s
• Oil shocks that disrupted global economies
•  The 2008 Lehman Brothers collapse
• Global COVID-19 lockdowns
•  Russia’s invasion of Ukraine
• Trump’s tariff wars, including recent sharp market sell-offs

All of these share a common thread: extreme initial market reactions followed by a reassessment once more information becomes available.

What Triggers a Market Crisis?

Crises are usually triggered by unexpected events. They tend to blindside the market and can shift sentiment in seconds.

These events might include:

• The sudden failure of a major financial institution (e.g., Lehman Brothers)
• Global health emergencies (e.g., COVID-19)
• Political shocks (e.g., trade wars, tariffs, invasions)

When these shocks occur, recognize that normal trading conditions no longer apply. The market enters what I call the “Hot Potato Game”—where everyone is rushing to offload risk until the music stops.

Crisis Trading Survival Kit: Practical Tips

Trading during a crisis requires more than market knowledge. it demands psychological resilience and strict discipline. Here’s your survival kit:

Prioritize Risk Management

• Reduce leverage significantly.
• Avoid overtrading.
• Focus on capital preservation over profits.

Stay Informed in Real Time

• Use a reliable news feed.
• Watch for headline risk, markets often overreact to breaking news.
• Trade Short-Term and Stay Nimble• Focus on short-term charts.
• Exit quickly, don’t overstay your welcome in volatile trades.

Avoid Hope-Based Trades

• Don’t assume a bottom or top is in place.
• Let the market show signs that the worst has passed.

Always Use a Stop—But Be Realistic

• In high volatility, stops can slip, sometimes significantly.
• Prepare mentally and financially for unexpected losses.

Adjust Your Technical Approach

• Traditional support/resistance levels may not hold.
• Markets often ignore historical patterns during panic moves

Control Your Emotions

• Avoid knee-jerk reactions.
• Follow your plan, not the panic.

Recognizing When the Market Is Reassessing Risk

How do you know when the panic phase is ending and the market is shifting into risk reassessment?

Watch for these clues:

• Price Reaction to Headlines: If bad news causes a less intense reaction, the worst may
• Watch for any official response aimed at restoring a two-way risk
• Look for an chart patterns that indicate a high or low may be in for now.

The Current Crisis: Trump’s Tariffs

As this chart shows, the initial shock of the tariffs saw the SP500 fall sharply, with a 22% fall from a 6141 (record high) in a little over 6 weeks, including a 17% collapse in less than two weeks on President Trump’s shock announcement of of punitive reciprocal tariff rates.

Crisis Phase: Daily SP500 (US500 Daily) Chart 

As this chart shows, there has been around an 18.75% bounce off the 4798 low (to a 5698 high), which started wihen President Trump, on April 9, ordered a 90 day pause for most countries to give time to negotiate new trade agreements. The backtracking seemed to be triggered by a flight from US assets, led by the bond market, which seemed to send alarms off in the White House. One exception has been a trade war with Chine where there has been a glimmer of hope recently that there may be a thaw, which has helped stocks and the battered dollar find a footing.

Reassessment phase: Daily SP500 (US500) Daily Chart

So you can see by these charts what is meant by expecting the worst and what happens once the initial shock wears off as markets reassess the risk. During the latter, markets responded to news that would have otherwise been ignored in the initial piecing in the worst outcome phase.

Meanwhile, the jury is out as to what comes next as there is still more uncertainty than certainty and a clue will likely come from how markets react to news (e.g. trade deals). Most important will be how eventual trade talks with China turn out where each side will look for a way to declare themself the winner.

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