The Great Recession, which lasted from December 2007 to June 2009, was the longest economic downturn since World War II. Now, a decade later, there is talk and worry that another one is coming, likely in 2023. While many investors lost their stakes in panic selling, for traders, recession presents an opportunity for taking advantage of it instead of being exploited. The trick to survive a recession is to remain prudent, yet keep an eye on market trends to recognize profit opportunities. Be sure not to miss it!
Recession: Where Bad Times Prevail!
In the wake of the recent global economic crisis, there have been many dire warnings coming out, particularly from advanced economies. The unemployment rate was rising, profits for companies were decreasing, the financial markets were in free fall, and the housing market was on the verge of collapse. Considering the deteriorating economic consequences, we have seen this year, what do you think caused them? That’s right, “Recession” makes perfect sense.
Calling a Recession
According to economist Julius Shiskin, a recession can be defined as two consecutive quarters of declining Gross Domestic Product (GDP). NBER defines a recession as a substantial decline in economic activity that lasts for over a few months, which is normally reflected in GDP, income, employment, industrial production, and retail sales.
In layman’s terms, a recession occurs when companies make fewer sales and profits, people lose jobs, property values decline, and investment capital becomes scarce. Observing the key economic data of a country can be a good way to tell if it is in a recession. Shortly, every aspect of the global economy is affected by recession and will undergo financial hardship for a few months or a couple of years.
What happens to investments during a recession?
The term ‘recession’ is enough to scare investors all over the globe, owing to a number of factors. Usually, a weak capital market is one of the first signs that an impending recession is imminent. During this period, the GDP drops significantly, production is lower, inflation is high, and the overall mood among the citizens severely deteriorates.
Consequently, this is going to lead to a drop in the valuations of companies, which in turn will have an effect on the market’s rise. Rather than holding on to their stocks, most investors liquidate their holdings and keep their cash instead to avoid losing money. The price of shares drops faster due to this insistent sell-off.
It’s pretty much a bloodbath when it comes to the stock market during times such as these. It is during this phase that even the best-performing companies take a hit, and their stock prices fall.
Best ways to Trade and Invest During a Recession
Despite the fact that investing in a recession can be nerve-wracking, you can still survive one if you know what to look for. While there’s no such market as “recession-proof”, you might be able to survive a recession by taking positions in certain types of assets, portfolios, and strategies. Certain sectors of the economy tend to outperform others during a recession, as consumer needs shift.
Make sure you consider the below considerations when putting together a trading plan for helping you survive a recession.
1. Diversify Your Investment Portfolio
One of the riskiest things that an investor can do to survive a recession is to rely on just one type of asset as a recession-proof investment. While most investors sell off their investments to have cash, you should think twice before doing so. Developing a sound portfolio diversification strategy is your best defense against a financial crisis and ensures that your holdings survive a recession.
Ensure you are spreading your investments across different industries and even different types of assets so that when the market slumps, your investments won’t be affected as much and your losses won’t be as deep. When it comes to investment portfolio diversification, there are a number of potential investment assets to choose from. A solid diversified portfolio may include Forex, Gold, Stocks, Indices, Crypto, and Energies.
You can’t find a magic formula that tells you how diversified your portfolio should be to survive a recession. As a general rule, you should include investments in your portfolio whose returns aren’t correlated. Diversification aims to spread risk across your portfolio so that the performance of one investment does not necessarily determine the performance of the whole portfolio in a recession, or that one part of your portfolio has the opposite effect.
2. Forex Trading During Recession
The decision to engage in forex trading during recession times proved to be a wise choice. Forex trading is recession-proof since traders have access to a wide variety of currency pairs, as well as the ability to go long or short with equal ease, regardless of the market condition.
The impact of a global recession will vary from currency to currency, so there will always be opportunities to make money even if this recession lasts a long time. As a result of a recession, currency markets are more volatile, which can lead to even greater trading opportunities.
It is also possible for forex traders who are not proficient in a wide range of asset classes to diversify their trading portfolios by creating a forex portfolio. Forex portfolios offer a wide variety of opportunities for diversification and profit-making, as compared to stocks, metals, or commodities. In addition, forex is the world’s most liquid market, which allows even an amateur to trade it immediately.
Other forms of trading, such as stock trading, may only be possible during certain times of the market day, which may restrict your ability to trade. It is important to note that forex market is open for trading 24 hours a day, so even when other markets are having a slow day, your trading activities will remain active while also remaining diversified.
3. Take Advantage of Safe Haven Assets
When the market is experiencing instability, investors will use safe-haven assets to limit their exposure to the risk associated with the market. Due to their uncorrelated or negative correlation with the economy, these assets can appreciate during a market crash and help survive a recession.
What are the best safe haven assets?
For one reason or another, safe havens can change over time, which is why it is important to stay up-to-date with current investment trends so that you do not end up making the wrong investment decision. Several safe havens, however, have remained favorites for years, for instance.
Gold — Most people think of gold when they think of safe haven assets. Gold is a valuable asset held by many central banks around the world to hedge against inflation and mitigate risk. The value of gold continues to hold, or even increase, even in the face of uncertainty and market downturns, and it has proven to be true time after time. However, psychology also plays a role. Demand and supply determine prices on the market. Investors often flock to gold trading during times of uncertainty or market declines as a safe haven investment. Consequently, because gold supplies are limited, its price rises due to high demand.
US Dollar — The US dollar (USD) is a safe haven currency due to the strength of the US economy. Since the USD is regarded as a global reserve currency, it is widely used in international transactions and is unaffected by domestic or international uncertainties. Additionally, traders can easily convert their assets into dollars because the dollar is the most liquid currency on the foreign exchange market. For the first time in two decades, the strong US dollar, on a steady upward trend for a year now, has exceeded the ‘Euro’ and is unlikely to ease off anytime soon!
Safe Haven Stocks — Stock markets may seem like a risky investment during times of uncertainty, but there are defensive industries that can perform well despite market conditions. They are regarded as safe haven stocks. What do Netflix, Microsoft, and Apple have in common? They have all recovered from previous recessions stronger. If you’re willing to survive a recession in the stock market, stock trading may be one of your best options. It is a fact that several successful traders make their living by trading stocks.
4. Opt for Short-Term Trading Strategies
Option for short-term trading can be the fastest way to grow your financial standing quickly during a recession.
The most common derivatives used in short-term trading are spread bets and CFDs. Based on how the market performs, you can use them to buy or sell assets based on whether you expect the asset’s price to rise or fall. Though this can also be risky, with the proper risk management plan and a successful trading mindset, any trader can overcome such risks.
A short-term trade involves making a decision to hold a trade for a few minutes, hours, or even by the end of the day, usually for not longer than seven days. Although the risks associated with it are quite high, it is a more attractive option for traders who are looking for quick profits. With this approach, smaller gains can be made, but the trade frequency heavily determines how successful the approach will be. Traders are able to take advantage of quick market movements throughout the day simply by spotting them quickly. When all is said and done, the cumulative profit can be very rewarding.
Due to the fact that the volatility of an asset fluctuates more during a recession, short-term traders have a huge advantage in generating profits from the implied volatility of an asset and the subsequent price action. This volatility is used by scalpers and intraday traders to enter and exit positions within a matter of minutes or hours and profit from price movements.
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5. A Good Time To Hedge
Hedging is the process of purchasing assets that perform in the opposite direction to one’s initial investment so as to eliminate the possibility of loss on the initial investment. It’s basically a way to reduce the chances of adverse price movements.
When financial markets are in decline, traders’ portfolios can be protected through hedging strategies. Today, almost all trading and investing involve the hedging technique. The use of hedging techniques is prevalent among corporations, portfolio managers, day traders, and individual investors to protect themselves against potentially dangerous risks. Hedging strategies can significantly minimize your chances of losing money on your trades, regardless of the type of financial instrument or trading style you choose.
While hedging strategies can be applied to all markets, forex is the most common, given the number of factors involved. In order to protect their open positions, traders hedge their positions by buying additional assets or selling existing ones. By adding hedging into a forex trading strategy, traders will not only reduce the risk of losing profits but will also be able to protect their profits from trading losses.
Choose A Reliable Trading Platform
Even a successful trading strategy is doomed to failure when you select a scam trading platform offered by an untrustworthy broker. It is therefore essential to choose a trading platform or brokerage that offers secure accounts and reliable trading conditions. AximTrade stands out as the best broker in terms of its reliability and excellent trading conditions, offering Forex, Stocks, Crypto, Indices, Metals, and Energies, with advanced MT4 technology and a Copy Trade solution.
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