Author: Shams ul Zoha
How to Trade in a Recession
A recession is a period where the global economy, or a specific economic activity, faces a period of contraction. This causes turmoil and there are many widespread issues with the markets. There is less spending, fewer jobs, companies going into bankruptcy, etc., due to the loss of confidence in the financial sector. High-interest rates, lack of regulations, poor price controls, and market crashes are also significant reasons behind such disruption.
Despite all the negative outlooks, there are some advantages to trading during a recession. For example, those with a fixed income can enjoy the depreciation by purchasing assets at a lower cost. Investors can become disciplined, and there are opportunities to buy financial instruments cheaply. Our article will discuss the right way for you to tackle periods of recession, alongside a brief introduction about a forex trading tool that can help grow your account.
Recessions for Fundamental Traders
Fundamental traders usually use swing and position trades in their portfolios, as they have a broad monthly or yearly outlook. For a positive outcome, investors generally rush to assets considered safe havens like the United States Dollar. It maintains its liquidity and lack of volatility and is one of the safest currencies in the world. To make it easier to execute positions on major currency pairs, study the instrument’s behavior during previous recessions.
What type of news should I consider in my account with fundamental trading?
Any regular important event that holds its value is still worthy of looking after during recessions. The unemployment figures, GDP, interest rates, and inflation rates should be watched at all times. However, as these markets are uncertain, it is not guaranteed that the currency will increase/decrease its value over a certain period.
Forex pairs' values will most likely fall, as investors pull out of the riskier assets and move to safe heavens. But before going short with all your equity, remember, the likelihood of decreasing inflation with a better margin is also present, which may increase the currency’s price. The same effects may influence other major economies meaning there would be no significant difference in supply and demand. For example, during the great recession, the US dollar value remained static as falling interest rates and high debt were common.
Image 1: The US dollar index, which tracks the greenback’s value with other major currencies, shows slight fluctuations during the great depression of 2007-2009. The price comes back to the same point as at the start of the economic turmoil.
Recessions for Technical Traders
Traders who thrive on price action, indicators, and EAs to trade recession can face potential hurdles due to volatility and liquidity changes. In some cases, you can think of the situation as being similar to trading conditions during December and January when participants take their yearly vacation. The asset can rip off strong support or resistance as if it wasn’t even there, break out of trends easily and show random spikes.
Image 2: A 1-hour chart of USD/JPY under observation by a price action day trader. The Covid situation had investors worrying over a major recession in Q4 2020. The US dollar and Japanese Yen did see a few random conditions, which are highlighted under yellow.
To stay safe with such issues, a price action trader can shift his forex trading during recession to higher time frames as they help clear out the noise, add multiple confirmations, and provide high probability setups. Adapt to the markets by switching your style in this hour of need. Develop a better understanding of fundamentals during this stage as the big players identify the significant movements.
For participants who focus on using their indicators and automated bots, they should use them carefully with proper money management, as explained below.
A few good tips
Lowering your position size with sound risk management techniques can help both fundamental and technical traders. It may decrease your monthly gains, but at the same time, it can save your portfolio from margin calls. Traders are also advised to diversify their portfolios and invest in equities or pairs with more extensive market caps. Never forget to journal your trades as the next recession might be just around the corner.
Many people flee to investing in the financial industry without any prior knowledge as they fear losing their jobs while the recession lasts. Keep in mind that both amateurs and pros struggle during this stage, which may last for months or years. Wait for the markets to normalize, then put your funds in slowly.
About Forex Copier
Forex Copier is an automated software that helps you copy your trades on the same or different PCs. It has two versions:
Forex Copier remote 2 for copying trades remotely from one MetaTrader® platform to another.
Forex Copier 3 copies trade between MetaTrader® platforms on similar PCs.
The copy trading software has many valuable features, including lot/risk management, price adjustments, order filtering, tweaking SL/TP, and emergency stops to help you get an easy edge in the industry. It is possible to diversify your trading accounts and brokers by distributing your equity over several portfolios and using the auto trade copier to copy positions from one account to all of the others. You can also choose to sell subscriptions to your signals and EAs to investors worldwide, with or without access to their login credentials.
The scope here is unlimited, as the Forex Copier can help gurus in teaching by sharing their executions. For traders on a losing streak, the mirror trading software offers a reverse mode that turns all incoming buys into sales and vice versa with modifications of the exit and entry points.