Introduction
Some professional traders relish the idea of trading during a recession. A recession spells trouble for many traders. Especially retail traders who do not work with the same level of capital as investment banks, pension funds, or hedge funds. The last serious dip in the stock market took place in March 2020, when the world ground to a halt.
Many people were concerned for their future during this difficult time. However, some traders entered the market. Those who entered the market will have come out in substantial profit as the markets rebounded fiercely. Forex during recession can be a small snapshot of the bigger picture. If you can focus on that picture instead of the short-term turbulence, you will operate in the same capacity as a professional trader.
Forex during recession works slightly differently; today, we will explore exactly what it entails. Due to the interwoven nature of foreign currencies within the global economy, they can operate in tandem if there is a major shock. Trading forex during a US recession could work to your advantage due to the major currency pairs predominantly containing the chief world currency.
What Happens To Forex In A Recession
Forex reacts similarly to other markets where you can trade assets. This includes stocks, commodities and cryptocurrency, although the latter is usually far more volatile. Forex volatility during the recession can be a turbulent and stormy journey to navigate properly. What happens to forex markets in recession can be a question that has many answers. However, the overriding theme is that a recession does not play out well for most investors, traders and those at the lower levels of society.
Trading Forex During Recession As A Beginner
Some beginner traders may wonder, “is forex recession-proof?”. Forex isn’t a recession-proof market, unfortunately. It can suffer just as much as any other market during a negative downturn. However, professional traders can still make money by trading between a currency pair that doesn’t drop as much as one of the other major pairings. Identifying what happens in the forex during a recession is key to coming out of the other side with your capital intact. Forex and recession can go hand in hand if you time the market right and know what you’re looking for. However, it would be best if you also were incredibly careful due to the heightened volatility likely to occur during this time.
An Example Of How This Looks
Let us use a theoretical example. In a serious downturn, let’s imagine that the Euro drops 10% in value and the US Dollar drops 7%. So even though it appears you are trading forex during a US recession, you are taking advantage of the small price differences. The incremental and marginal benefit of holding the Dollar over the Euro at that specific time can provide an opportunity. The answer remains the same if you are curious about what happens to forex when one economy enters a recession. Forex during recession can seem intimidating, but as long as you remove emotion and trade with your head, you give yourself a better chance of turning a profit.
Although both have dropped, if you hold Euros and buy Dollars during this downturn, you will have effectively managed the risk. The main issue to look out for is less activity during a recession, as this means opportunities will not present themselves as often as they might during times of strong economic growth. If one of the major currency pairings enters a recession, forex traders will take advantage and look to short the currency and potentially another forex during recession.
Can You Trade Forex During Recession?
Yes, you can trade forex, irrespective of market conditions. Some traders prefer to trade forex during a recession. If you are trading during this volatile time, you must know your capital is at risk.
Even top professional traders must try to establish the market’s direction. Some of these traders have access to all the information, chart analysis and external factors that could drive the market, and they can still lose money. This is because people are still determining what direction the market will head, and even with the most effective due diligence, you can still lose all of your investment.
A recession can be the most difficult time to trade due to the volatility in the market. It can cause you to get caught up in emotion. One of the crucial rules of trading is trying to remove any emotion from your trade. Enter the market at your chosen price, execute your trade at the predetermined price, and leave. That’s the motto of many professional traders who know what happens in the forex during a recession. Of course, this strategy is difficult to implement when looking at a successful chunk of profit.
The best way to mitigate this is to install top-of-the-range software that automatically lets you buy and sell your asset at your chosen price. You do not need to be sat at your trading desk or glued to charts. Setting up stop loss and take profit is just one of the ways you can manage your risk effectively.
Crucial Factors To Consider When Trading Forex During Recession
A couple of components are more pivotal when dealing with forex trading at the height of a recession. One of the key points that people consider is should you short sell forex during recession.
Government Deficit
The first point we will tackle in this section is the budget deficit, also known as government debt. Some of the strongest world economies have difficulty stimulating growth as this usually involves printing money which can lead to inflation. If a government lowers interest rates to encourage more spending instead of saving, this can negatively affect inflation, which we will discuss later in this section.
This is because when interest rates are low, governments and central banks turn their attention away from investors and investment products. All of these combined result in a perfect storm of economic uncertainty. Forex rates increase in a recession depending on what currency pair you are looking to trade.
This stops people from investing in investments such as forex and causes the market to stagnate or prices to drop. Forex is considered one of the key assets that comprise international markets. Not only does this decrease in activity damage their prospects, but it also results in the currencies themselves becoming worth less.
Economic Policy
One example of the profits from shorting currency can be highlighted from the disastrous mini-budget that Liz Truss’s administration released. This occurred in the United Kingdom in September 2022. The pound fell to a 37-year low against the Dollar. Huge tax cuts for the richest individuals and the increased borrowing they announced were the main cause.
The United Kingdom economy is currently in recession. If you are wondering should you short sell forex during recession, in this instance, you would have made a lot of money. Some traders predicted this budget would cause such havoc and shorted the Great British Pound. In turn, they made staggering amounts of money overnight.
Inflation
Inflation plays a big role when it comes to forex markets in recession. A recession will usually indicate the depreciating power of a country’s currency. Suppose a government needs to intervene during a recession to print more money (increased borrowing) or cut taxes to fuel spending. In that case, these can cause inflationary pressures, which cause the price of the currency to depreciate in real-time and real value.
This is what happens to forex markets in recession. It is the harsh reality of how inflation can have such negative consequences when trading these assets. Some traders will purchase commodities such as gold to hedge their investment against a tangible during currency depreciation. Whether it is forex during recession, or stocks or cryptocurrency, many analysts advise having a diverse portfolio. This is to insulate yourself more effectively against periods of market uncertainty.
Inflation is a big factor to consider. It doesn’t matter what techniques you use to trade forex. Whether it is a triangle pattern, an evening Doji star or a Fibonacci sequence, you must pay attention to these extremely vital external factors, which can result in the market moving in a volatile direction, up or down. Suppose you can account for all these variables whilst trading forex during recession. In that case, you stand in better shape than a beginner trader just starting in forex during recession.
How Well Do Forex Traders Do In A Recession
If the history of forex recession has taught us anything, it is that some of the biggest players in the market will execute their trades when they believe it is most advantageous. For many of these huge traders who shift the market whenever they enter it, a recession provides ample opportunity. Forex during recession can often be business as usual for high net worth trades, although we cannot say the same for retail traders who trade towards the bottom end of the market.
George Soros
For instance, George Soros executed arguably the greatest forex trade of all time at the height of Black Wednesday in 1992, when the United Kingdom’s economy was in complete turmoil.
A recession affect forex in both directions. It makes the currency’s purchasing power much lower for millions of people. However, traders at the top who can move the market with huge trades can benefit immensely from the volatility.
Andy Krieger
Another example of a scintillating trade occurred in 1987 during the Black Monday crash. Andy Krieger, a trader, identified which currencies were rallying against the US Dollar following the crash. He predicted that there would be big scope for a substantial arbitrage trade opportunity based on the overvalued smaller currencies.
He picked the New Zealand dollar as his currency of choice and used a fairly new technique at the time, which is now widely used, called options trading. The position was worth hundreds of millions of dollars and was considered one of the all-time great forex and options trades. In Krieger’s case, if you ask yourself, “does recession affect forex earnings?” – yes, it did, in an extremely positive way.
The fact that both of these trades occurred when the market was in turmoil shows that there are plenty of ways to trade forex during recession. You could argue that the most lucrative time to trade is when the markets are spiralling out of control. However, we used two examples from professional traders who made serious money by trading as their full-time job. You may have to apply different techniques if trading outside your full-time job.
Will Forex Survive A Global Recession?
If the forex markets were to capitulate completely, this could signal the end of civilisation as we know it. The reason is that trillions of dollars of foreign currency are traded daily on these markets. The key forex pairings are
- The New Zealand Dollar & Us Dollar: NZD/USD
- The Euro & Us Dollar: EUR/USD
- The Us Dollar And Canadian Dollar: USD/CAD
- The Us Dollar And Japanese Yen: USD/JPY
- The British Pound Sterling And Us Dollar: GBP/USD
- The Us Dollar And Swiss Franc: USD/CHF
- The Australian Dollar And Us Dollar: AUD/USD
If this market fails during a serious recession, all of these currencies will experience huge difficulty. Forex during recession is a volatile juggernaut of a market, but nobody questions whether or not it will survive purely because of the magnitude of what failure would signal.
It is hard to state just how much of a devastating impact this would have on the global economy. It would result in huge issues with trade, healthcare, and transporting essential goods like food, medicine and oil.
For those who do not remember, the 2008 global recession was a time when people wonder was the forex market affected by recession. The short answer is yes. Major economic emergency plans were laid out in the UK. This involved the government printing tens of billions of pounds to save some of the biggest banks in the country. A forex trade recession plays out like any other market, whether in cryptocurrency or commodity markets such as silver.
What Happens In The Forex Graph During A Recession?
Identifying how a graph operates during market volatility can be the key to a successful trade. There are dozens of different types of chart analysis that traders implement to try and increase their chances of making a successful trade. Some of the chart patterns you can read our extensive guides on are as follows:
The example below clearly details what happens in a forex graph during a recession. When traders look to trade this type of pattern, this is the sort of shape they look for before they enter the market.
Does A Recession Effect Forex? Final Thoughts
Forex during recession can act like any other marketplace. If the conditions are dire enough, they usually plunge in unison. However, like the examples we have touched on today with Soros and Krieger, there can be opportunities for specific currencies to provide a profit. If you have reached the end of today’s piece, we hope you now have a good working knowledge of whether forex during recession operates the same way it does during less volatile times.
