How To Trade Your Way Through A Global Recession
Ah, the economy… something that every trader hungry for success will need to get to grips with if they’re to start raking in the serious wins over time.
While there isn’t just one single factor that will determine your overall performance as a trader, understanding economic cycles and how they work, and keeping up with global economic news, will really help you grow and develop, maximising your chances of turning trading into a potentially very lucrative career… which is the dream, after all!
There’s a lot of talk flying around right now that a global recession is on the horizon for next year or the year after and, although various sources disagree about whether or not it’s going to happen or when exactly it’s likely to bite, doing some trading prep work right now just in case could help you navigate any potential storms in the future.
Remember that recessions have happened on numerous occasions throughout history and it’s natural for economic cycles to experience peaks and troughs… something you may well have already noticed on your trading journey, as well as how it affects your various trades.
Think of it like ocean waves, reaching their peak and then inevitably falling back down to be absorbed by the sea… then back up again, back down, back up and so on. When the economy is on the rise, this is known as economic growth, but when it’s receding, this is known as economic contraction (or downturn).
In order to be classified as being in recession, an economy needs to contract for two quarters in a row and there are many different reasons as to why this can happen. Unfortunately, it’s not always possible to anticipate or prevent a downturn, which is why preparedness is key.
What causes a recession?
There are, of course, lots of different theories as to why recessions happen, but this is perhaps to be expected, since there are lots of different economic, financial and psychological causes behind them.
During such times as these, businesses often feel compelled to scale back on production and limit the risks they face, with recessions often characterised by drops in levels of spending and investment. The GDP then declines and unemployment rates start to climb as workforces are reduced in order to minimise costs.
Research from the World Bank, published back in September, suggests that the world is on its way towards a global recession next year, with central banks simultaneously driving up interest rates in response to inflation.
Apparently, over the last 12 months or so, central banks all over the world have been hiking interest rates with a degree of synchronicity the like of which has not been seen in the last 50 years… and it’s expected that this trend will carry on well into 2023.
What’s more, unless labour market pressures and supply chain disruptions relent, it’s possible that interest rate increases could see the global core inflation rate reach approximately five per cent next year.
David Malpass, World Bank Group president, said: “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging markets and developing economies.
“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
With this particular threat looming on the horizon, it certainly can’t hurt to put a few plans in place, even if the situation does turn itself around and we do narrowly avoid the predicted downturn.
If you fail to prepare, you prepare to fail, after all! And the good news is that there’s a lot you can do to ready yourself for potential turbulence… and focusing on your forex trading career could be a great place to start.
Recessions are inevitably hard work and they can represent a huge amount of upheaval and uncertainty for a lot of people… but if you’re a forex trader, you may well be able to turn the situation to your advantage if you’re savvy with your work. They don’t say that forex is a recession-proof industry for nothing, after all!
Of course, for the many who believe that forex is recession-proof, there are just as many who say the opposite – so it’s all just a matter of making up your own mind and the only way to do that is through practice and experience.
You may find that you’re presented with some interesting investment opportunities over the coming months, since you’re able to choose your stocks from a wide range of currency pairs, going long or short as the situation requires.
Different currencies will be affected differently during a recession so there will always be opportunities to be found if you can spot them. The currency market is also likely to be more volatile in the near future, so you may find that even more trading opportunities come your way.
Forex trading in a recession
The forex market is a great one to focus on during a recession because it behaves in a different way to other asset classes, like the stock market which you would typically see take a nosedive during a downturn. With currency pairs, however, you are likely to see that those currencies that belong to stronger economies will do quite well, while weaker economies will see their currencies falter and slip.
Currency performance and demand is basically linked to the economy of any given country. During a recession, if a country that exports lots of goods sees a drop in demand from its international partners, it will inevitably mean that a drop in the value of that country’s currency will also be seen.
If you are going to maximise your profits during some potentially rocky months ahead, it’s essential that you keep up to date with all the changes and developments where interest rates and market conditions are concerned. Interest rates, in particular, can be used by governments and central banks to prop up economies and these are adjusted regularly.
Reductions in interest rates can have a positive knock-on effect for economies, stimulating spending and spurring the economy on. Looking for currencies that could offer you higher returns could be a good move – and to find them, you’ll need to have a good understanding and knowledge of the different economic fundamentals of different countries around the world.
The fear factor!
Something else to take into account when trading during a recession is the fear factor. This can have a big impact on demand for different currencies and, as such, should not be ignored when you’re reviewing your trading strategy.
Safe-haven currencies like the Japanese yen, the Swiss franc and the US dollar are expected to see an increase in demand during recession periods. These handy little fallbacks are your trusted trading options, those you choose to have in your portfolio to help minimise your risk when the markets are starting to show signs of turbulence.
They generally retain their value even when faced with a downturn and, in some instances, you may even get lucky and see them appreciate in value because they’re negatively correlated to the market. Want to stock up? Keep a look out for a stable political landscape, strong economic growth, high liquidity and permanence of demand.
Major currency pairs also typically do quite well in a recession, so focusing your attention here over the year ahead could help you navigate the choppy waters of a downturn more successfully.
No matter what happens externally, it’s essential that you remain confident in your abilities and that you continue to have faith in your trading strategy. All the analysis and prep work you did before you started trading will really stand you in excellent stead during tougher times, especially where currency volatility is concerned.
Big price swings are normal during a recession because it’s such a volatile scenario, which means that you will see more opportunities to generate some fast profits for yourself than you would do during quieter markets, but the risk is also higher… and you could lose big just as easily.
What makes it tricky is that currency volatility is by virtue of its own nature very unpredictable, so you may struggle to track it, but you can use historical and implied volatility data to help you trade.
What is key, however, is to understand the difference between volatility and risk. You have no control at all over volatility, but you’re the master of your own risk management destiny and you should always only ever take risks based on your own judgement and analysis, following your own personal risk management strategy.
There’s always an element of risk with volatile markets, but as long as you’re prepared, you should find that you’re able to trade during a recession with relative degrees of success.
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