Recession is a period of economic decline which is characterized by reduction in industrial and trading activity, as well as high levels of unemployment. GDP also falls which makes life for ordinary people harder.
There is no country in the world perhaps which has not experienced a recession once in their existence. Considering the events that are taking place in the world, it is actually very difficult to escape one. We have seen that clearly in 2020, when the coronavirus pandemic emerged and a massive crisis started. This article will talk about how to stay safe in a recession and mainly concern trading.
Forex during a recession
The main advantage of Forex is that, unlike other markets, it is not tied to a specific place, office, or assets. Forex is a large international market with daily trades from all over the world.
Forex assets do not depend on problems with transportation or storage of goods, there is no connection to material carriers, this is an electronic market where goods do not get stuck at the border.
If you are not yet equipped with many years of experience and are experiencing the excitement of trading Forex during a crisis, try using a shorter time frame of day trading. Also, don’t be too stressful about fundamental analysis. In times of crisis, it loses its previous informational content and is able, rather for informational purposes, to predict the further behaviour of currency pairs.
One of the main things to do during a crisis is paying attention to the importance of stop out level in forex, which is basically closing all of a trader’s position by a broker. It could be very useful to avoid complications during the trading.
The basis of the stock market is a certain product, therefore, as soon as the price changes, demand falls or there is a shortage of goods, this instantly affects the volume of trade and leads to an inevitable crisis.
The main commodity in Forex is currency (money), which will never cease to be in demand, this is the main feature of the market. Working on Forex, investors insure themselves against crises, and even earn money from them, because money will always be the most valuable asset.
In fact, trading currencies during a period of economic instability and recession remains quite attractive. At this time, the rates of some currencies rush to the tops, while others begin a smooth or hasty fall. However, both of these facts play into the hands of experienced traders who are able to make money in any market. It is only important for a player to choose the right moment to enter, calculate a stable trend and start stable trading in the Forex market.
Those traders who are familiar with the MetaTrader 4 trading platform may have already noticed not the best situation during the crisis and in the stock market, where shares are gradually depreciating, increasing the total number of bankruptcies. But the situation on the foreign exchange market is somewhat different. The most successful traders trade profitably here, as Forex is almost always stable.
However, currency trading is not without a serious drawback. In times of financial crisis, traders are forced to be especially vigilant and careful, to have lightning-fast reactions and resourcefulness. Only dynamic and aggressive actions can bring superb results and long-awaited profits in practice.
Tips for investors
If you are a non-professional investor, then during a crisis, it is best not to use high-risk instruments such as stocks, futures and other derivatives. For the inexperienced investor, the downturn should be a waiting time. As a rule, after a recession, world markets move to recovery in two to three years.
Acting during any crisis can be divided into several parts. First, reduce the share of stocks in the portfolio as much as possible, leaving only dividend securities that consistently bring interest. It is also necessary to increase the share of short and medium-term (from 1 to 3 years) bonds with a high rating and stable coupon payments at or slightly higher than current inflation. Long bonds should not be held during the crisis, as they are most sensitive to market volatility.
Secondly, we definitely add protective instruments to the portfolio. Here you can highlight precious metals, namely gold. This is almost the only asset that has survived all world crises and even brought income to its holders during the economic downturns. In times of crisis, gold brings investors at least 15% per year. Finally, the liquid part of cash should be formed from several (at least three) currencies in equal proportions. We give preference to the most stable of them – the dollar, euro, yen, pound and franc.
It should be mentioned that it is not always easy to calculate everything and remain completely intact during a recession. However diversification and proper trading could help you to remain stable.