In the face of sudden black swans, how should we deal with the risks in transactions?

We know that black swan events (that is, major unexpected events) will cause violent market fluctuations. It is certainly a risk event for the wrong party, but it is a huge profit event for the right party. So, is there any way to catch this kind of black swan event in advance or calmly deal with it afterwards?

In order to seek this method, I sorted out 20 black swan events around the world since the 1950s, hoping to find out the rules. These 20 black swan events are shown in the table below:

​By analyzing the reactions of various assets after the black swan event, I found that the black swan event can be attributed to six types:

First, it is nested under the larger fundamentals so that it is ignored by the market.

Such as "Gold Crisis", "Watergate Incident", "Prism Gate Incident" and so on. These events may be isolated, or they may be the product of some macro context, which is also unexpected by the market, but is ignored because it is nested in some larger macro context. Such emergencies generally do not trigger liquidity risks, so even if they occur during an economic downturn, they will not have a greater impact on fundamentals (but long-term impacts, such as the gold crisis, cannot be ruled out).

Second, the market fluctuated greatly, but it did not lead to a substantial and continuous decline in risk assets.

For example, the Brexit referendum (which also has a long-term impact on the UK, but the short-term impact does not last), the 2016 US election, etc. Such events only exceed market expectations and may have long-term effects, but they will not affect the economic fundamentals of the subsequent period. This sudden event does not affect the operating trend of various assets, but it will intensify market volatility before and after the event, and may also bring trading buying points for many assets.

Third, unexpected events pushed risky assets to fall sharply, but the adjustment time was relatively short.

For example, various short-term geopolitical risks, the Korean War; another example is the 1987 stock market crash, the 2018 Q4 US stock market crash, etc.

Such events only affect short-term market risk appetite, or cause periodic adjustments due to the overvaluation of certain types of assets, and such events will not trigger changes in economic fundamentals, and often occur during economic recovery or even overheating. Once the risk event is over, or the monetary policy is relaxed, the impact of the situation on the market will end.

​Fourth , unexpected events trigger the continuous adjustment of risk assets, and even bring about trend effects.

Such events often occur in the late cycle or recession of the economy, triggering the economy to switch from the late cycle to the recession or exacerbating the degree of economic recession. Such as the Vietnam War, the oil crisis, and the current impact of the epidemic.

Fifth, unexpected events have induced a liquidity crisis, which may trigger a continuous adjustment of risky assets.

For example, the bankruptcy of Long-Term Capital, the bankruptcy of Lehman, and the failure of Bridgewater’s riskparity strategy are actually the results of the Asian financial crisis, the subprime mortgage crisis, the epidemic, and the impact of ultra-low oil prices. However, due to the size of the financial institutions or the financial products they created Larger, thus triggering market liquidity risk. Generally speaking, such incidents often occur at the "critical point where a certain transaction model is born in a certain economic and financial environment, and the model is continuously enlarged, and the dividends of the financial environment are continuously swallowed." Taking the Riskparity strategy as an example, the QE-driven fall in risk-free interest rates and the rise in financial asset valuations are important backgrounds for its birth and development. At present, the risk-free interest rate has fallen to an extreme level, and the double killing of stocks and bonds in the same direction has invalidated the strategy and triggered a crisis. Market Liquidity Risk.

Sixth, key long-term turning point events.

For example, "the US dollar was decoupled from gold on August 15, 1971", the oil crisis, the "Plaza Agreement", the 9/11 incident, the "European debt crisis", and the "Brexit referendum". But the impact of such events on asset prices varies greatly, depending on which countries are beneficial or harmful, or whether they are beneficial or harmful to the world.

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With such a division, the conclusion can be seen clearly: the black swan event itself is only a disturbance factor, because these unexpected events themselves will not cause a reversal impact on the original commodity trend. However, in this process, the amplitude of various assets will inevitably intensify, and its impact on the market even exceeds the limit of our daily consciousness. Under extreme panic, the market will quickly sell risky assets and form a risk aversion mood, but it will soon return to rationality. Buy low-risk assets.

To put it more simply, the black swan event caused the bungee jumping market at the beginning, but as time went by, its influence gradually disappeared, and the market returned to the original trend again.

With this conclusion, we have traces to follow when dealing with the black swan event:

1. If there is a short position in the black swan event, then you can follow the direction before the black swan event, and gradually build a strategic position as time goes by, and plan for the future market return in advance.

2. If you are betting on the right direction in the black swan event, you should make a decisive profit and leave the market within two days of the black swan event.

3. In the black swan event, if you bet on the wrong direction with a full position, you should set a stop loss position on each order. Then at this time, you will be automatically stopped at the beginning, which is equivalent to a short position. Then start to repeat the operation of point 1.