Economic recessions are inevitable occurrences, typically hitting every 7 to 9 years and are generally accepted as a natural phase of the economy. While no one knows how long a recession lasts, the financial consequences of making poor trading decisions during the recession can be devastating. Interestingly, there is one market that remains viable even when the stock and crypto markets plummet. Forex trading during recession offers excellent profit opportunities, as it offers income opportunities even during economic downturns. Let’s explore!
What is meant by a Recession?
According to the National Bureau of Economic Research, a recession is a prolonged period of deteriorating economic performance that affects a single country or group of countries for an extended period of time. Businesses, consumers, governments, and investors all feel the effects of this global crisis, with effects felt worldwide.
While a recession does not have a set definition, it is typically characterized by a decline in economic data including the decline in GDP, unemployment, real income, production, and sales. If you look at the statistics, it is often said that GDP has to decrease for two consecutive quarters in order to be considered a recession. GDP is a measure of the economy’s manufacturing and service sectors.
An economic recession usually occurs every seven to nine years and is considered a normal part of the business cycle. However, it is not clear how long recessions last. In some cases, recessions are only short-term and have a localized effect rather than creating a global impact. There may be a short-term political event responsible for this, such as the Brexit referendum, causing investors to panic. In the short run, it caused a decline in confidence and economic production levels, as well as a drop in the value of the pound.
Considering all of these factors, one might wonder if investing makes sense during a recession.
Nevertheless, is it wise to keep every dollar you earn in cash instead of investing it in the future? You’d be wrong, as recession and inflation grow, the value of every dollar you keep in the bank decreases over time. Let’s take a look at how forex trading during recession might be a good way of boosting it wisely and in time.
Can you trade during a recession?
If you want to protect your hard-earned savings during an economic recession, it is crucial that you choose the right financial trading products to trade or invest with so that you will be able to benefit from market fluctuations for the foreseeable future.
Despite the fact that traders have access to a wide range of markets, including Forex, Stocks, Commodities, Indices, Bonds and Cryptocurrencies, recessions can cause some of these markets to drop or rise. Nevertheless, making the right choice during an economic recession would be to invest in a ‘safe-haven’ asset.
A safe-haven asset is a market that is expected to retain its value even if the global financial markets suffer a brutal downturn as a result of a global recession. In the financial market, Gold is often perceived as a safe haven due to its classic use as a form of currency back in ancient days. For those who are looking to engage in forex trading during recession times, the Swiss Franc stands out as a safe haven because of its ability to withstand volatility and its stability.
It is important to understand the different asset classes that you can trade in order to be prepared for times of recession. Here’s the Ultimate Guide to Ace Investment Portfolio Diversification that will keep you safe from financial crises and help you grow your assets.
Forex Trading During Recession: Is it a Smart Move?
Opting for forex trading during recession is without a doubt a smart move. In fact, forex traders should always be aware of recessions and must prepare themselves accordingly if they want to maximize their profits. This is because the foreign exchange market behaves differently during a recession than other asset classes. The stock market, for instance, tends to fall in value during economic slowdowns, but currencies are more of a lubricant than a tangible part of the economy. During times of recession, it is likely that the currency pairs belonging to stronger economies will gain value relative to those of weaker economies.
The reason for the potential demand for the currency of one country to a greater or lesser extent is based on the economic fundamentals of the country. Consider for example the currency of Japan, which is a major exporter of goods, as a classic example. When the global economy is in recession, Japanese auto manufacturers and tech firms can expect lower demand. It is evident that a large part of that demand comes from international trading partners, which means that any reduction in demand for Japanese goods will result in a reduction in the Japanese yen being bought on the currency markets.
Forex trading during recession times can be successful upon combining both fundamental and technical analysis, each of which is used to determine the short- and long-term price movements.
Currencies that suffer badly during a recession:
To be successful at forex trading during recession periods, it is essential to conduct thorough research and monitor key data points such as interest rates and market conditions. It is common for a government or central bank to provide support to an economy that is experiencing contraction. Interest rates are among the most effective and fast-acting tools a central bank can use as a policy tool, and most central banks are accustomed to adjusting these rates at regular meetings – which usually take place about once a month on average.
A reduction in interest rates can have a positive effect on the economy as borrowing becomes cheaper. The added cash flow benefits both consumers and corporations, and a virtuous circle of additional spending and production can propel the economy forward.
Furthermore, it has been estimated that with lower interest rates, investors will also receive lower returns on their savings. Another economy, which is not going through a recession or is outperforming its peers, can expect to keep its interest rate higher in the meantime. When you sell one currency and buy another, you can switch to a currency that offers higher returns and it affects the price of the other currency.
Trading the exotic currency pairs and the cross currency pairs is often considered a riskier approach when you choose forex trading during recession times. This is because these currencies are playing a very little role in the global financial system and are often prone to extreme price volatility during these recession times. Usually, both the exotic currency pairs and the cross-currency pairs represent the currency of an emerging economy or a developing country.
Currencies that perform well during a recession:
During a global recession, the currencies of the countries with stronger economies, also called major currency pairs, have the tendency to strengthen during periods of economic uncertainty. There is a good chance that interest rates will remain at higher levels due to the fact that the central bank is equally concerned about inflation as it is about a possible slowdown in growth.
The fear factor and economic fundamentals both need to be taken into account. In times of global recession, the demand for the US dollar, Swiss franc, and Japanese yen is expected to increase, as they serve as safe-haven assets. It is best to hold the currency that is least likely to get caught in a bank run if a protracted recession causes a meltdown of the global financial system.
Recessions can also cause big corporations to scale back expansion plans as a result of downturns in the economy. Currency prices will also be impacted if US-based multinationals scale back on ambitious overseas projects. The demand for the currencies of emerging markets will fall as an investment in these countries falls, making them less valuable.
A survey shows that, among the 7 major currency pairs, EUR/USD is the most traded with 39% of all transactions, USD/JPY is next with 21%, GBP/USD is 15%, and AUD/USD is 10%. Traders usually have more opportunities to profit from these currency pairs because of their high volume of trading, especially with the EURUSD pair. Furthermore, in comparison to any other major currency pair, the EUR/USD pair has the lowest spread.
5 Reasons Why Forex Trading Is a Recession-Proof Activity
Most investors tend to take a defensive approach when the economy is going through a period of contraction by pulling out of the markets for a while. However, the fact still remains that despite a recession being characterized by falling prices and making it difficult to decide what you should be trading during a recession, there can still be some value to be found. Opting for forex trading during recession periods certainly falls into that category. Listed below are some of the reasons why you should do so!
1. You Can Make Profit Even in a Bear Market
The majority of investors are familiar with the basics of how the stock market works and how to trade stocks. Stocks of a certain company go up in value if the company does well and if you own stock in that company, you earn when the value of your share increases. A bull market is a good time to take profits. However, in the case of downtrends or bear markets, things are a little different. In bear markets or during market downturns, the chances of making money in stocks are very slim. To avoid losses when the market makes a downward reversal, you should exit your trade.
Here’s why forex trading during recession times stands tall, as it is a much different kind of investment than stocks and other types of investments. If you trade forex, you’re buying and selling a currency pair, which means you’re expecting one economy to do better than another. There is a possibility of earning a good sum if your expectations are accurate.
One of the greatest advantages of forex trading during a recession is that it is possible to make a profit by going both long and short. The term “going long” refers to the act of buying, while the term “going short” refers to the act of selling. Both terms are used to describe the processes involved in executing forex trades. A trader will “go long” on an asset when they expect its price to rise in the future. They can also go “short” if they believe the price will fall in the near future.
A major advantage to forex trading during recession scenarios is that it is relatively simple to trade long or short, which is not the case for many other assets.
2. The Forex Market Does Not Fall Under Any Disaster
Yes, you read it right. Taking part in forex trading during recession times can be an appealing prospect due to the fact that it cannot be easily impacted by disasters. Since the forex market is decentralized with no middlemen involved, it would adjust itself very quickly following a market adjustment and would once again level the playing field for all.
A forex market fluctuates due to a number of reasons, including the economy, supply and demand, as well as a number of geopolitical issues, which affect prices. Trading Forex involves predicting the price of the currencies in the future, so anyone can make a profit by anticipating the direction the market will take. Technical analysis and fundamental analysis are the two main types of analysis forex traders use to predict market movements. You can rely on either one or both of them when it comes to predicting the direction of the market as a forex trader.
3. The Price Movements Are More Volatile
Normally, volatility in the foreign exchange market refers to the price fluctuations of a currency pair over the course of time. It can also be defined by how quickly prices fall or rise. Since forex trading is considered a highly volatile market, there is a greater opportunity to profit in a shorter time frame, however, the risk is also higher.
An economic downturn or recession is usually accompanied by a highly volatile scenario, which means that the price swings from day to day will also be greater than what is normal. Consequently, forex trading during recession times has the potential to give a trader the opportunity to generate profits more quickly than they would be able to do during normal, quieter market times, although with a higher level of risk, as we mentioned earlier.
Nevertheless, in markets with higher volatility, like forex, profits can disappear quickly, resulting in losses. It is therefore important to prepare for the trade in advance. By learning to manage volatility in a disciplined manner, you will be able to minimize your risks while also maximizing your gains.
4. Forex Offers More Liquidity
The liquidity of an asset can be defined as the ability to convert it into cash within a short period of time. There is no doubt that the forex market has the highest level of liquidity out of all the trading markets. In other words, there are lots of buyers and sellers trying to exchange money around the clock.
Approximately $6.6 trillion is exchanged every day in forex by individuals, companies, and banks, more than in the stock market. Aside from converting some capital into other purposes, most of the activity focuses on earning a profit, which adds to the advantages of forex trading. High liquidity also facilitates quick and easy transactions. Transaction costs (spreads) are typically low on financial markets because money flows in and out continuously.
Having a high liquidity level also ensures price stability, which is the most important factor. With forex being such a large market, there will always be someone willing to buy or sell a currency at the quoted price, making trades and transactions possible at any time. However, when volatility is high, getting a good fill may be difficult. Just as in any other market, slippage is also possible during periods of instability.
5. Protect Your Portfolio with Forex Hedging
Hedging can be described as an investment strategy that mitigates the risk of losing money on one investment by purchasing a second investment that performs at the opposite end of the spectrum. In other words, it is a technique that reduces the possibility of adverse price movements of an asset.
Forex hedging allows a trader to minimize investment risks from potential market downturns. There is no doubt that hedging strategies can be used in a wide range of markets. However, the forex market is the most commonly used hedging strategy since it allows traders to trade globally on thousands of markets, including multiple currency pairs, without holding any physical assets at the same time.
Forex hedging also allows you to create a profitable diversified portfolio. However, make sure to find a platform that allows you to do so. AximTrade stands out as the best broker in terms of its reliability and excellent trading conditions, offering Forex, Stocks, Crypto, Indices, Metals, and Energies, and facilitating in-depth market analysis using various tools accessible through the MT4 platform. Read the AximTrade Review for information on trading forex with a reputable broker.
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