The recent coronavirus pandemic has taken a huge socio-economic toll across the globe, with high levels of unemployment and declining GDP forecasts impacting on both developed and developing economies alike.
The challenge facing households is how to improve their financial lot in the current climate, and while some may look to make daily cash savings, others will look to generate an additional, passive income stream through forex market trading.
There’s no doubt that the $6.6 trillion-a-day forex market can offer potentially huge returns in the current climate, thanks largely to its margin-based and derivative nature. But what do you need to keep in mind when trading currency during a recession?
Understanding Recessions and Their Impact on Forex Trading
In precise terms, the term ‘recession’ is used to refer to two or more consecutive quarters of negative economic growth. This is usually measured by GDP, although a host of other indicators of macroeconomic performance (such as unemployment) can also be used.
Of course, recessions can also last for far longer than two financial quarters (or six months), depending on the extent of the crisis and the core factors that are driving this.
The term is certainly being used a great deal at present, with the global economy expected to slip into a recession during the second half of 2020. This will come almost 11 years after the financial crash of 2008, while nations such as the UK are expected to experience a particularly steep economic decline in the wake of the Covid-19 pandemic.
The question that remains, of course, is how do recessions impact on forex trading? In simple terms, it tends to trigger the widespread devaluation of major and minor currencies alike, particularly as nations look to combat the impact of recession by introducing quantitative easing measures such as reduced base interest rates.
From a trader’s perspective, a recession may also trigger a sense of caution amongst risk-averse investors (including large institutions and big banks). Conversely, those with a greater appetite for risk may see a recession as an opportunity to boost profitability, by investing in currencies at low rates and selling them once the economy begins to recover.
This is commonly referred to as “going long” or performing a “swing trade”, and represents a method best used during relatively short or brief periods of recession.
How to Safeguard Yourself During a Recession
In this respect, swing trading during a longer recession (which is likely to unfold in the wake of Covid-19) may not represent the best value, while day traders may also struggle given their desire to generate profits from daily price shifts and movements.
However, if you do choose to trade forex during a recession, there are a couple of steps that may help you to safeguard your capital.
Firstly, you should utilise a mobile trading platform such as the MetaTrader 4, which allows you to monitor market trends and execute orders whilst on the move. Similarly, this platform features a number of analytical tools and technical indicators, while its enhanced level of customisation makes it easier to study and act on specific trends.
Secondly, you should use online trading platforms to set stop losses and manage your risk accordingly.
This will automatically close selected positions once they’ve incurred a predetermined level of loss, enabling you to manage your capital responsibly and stay in the black even as the recession unfolds.