The COVID-19 pandemic continues to spread around the world. And even though the situation appears less dire than in March or April, it cannot be denied that a crisis of this scale has had a massive impact on the foreign exchange market. Entire countries have been going under lock down and entire sectors being placed on hold. The looming threat of a global recession became inevitable, and currencies were bound to react. Has COVID-19 changed the way we trade?
After a short period of uncertainty, the market is slowly starting to recover. But it hasn’t come without some changes in trader sentiment. With any event of this scale, it’s normal for the population to change the way they spend their money. Or to adapt their investment strategies to the economic reality.
For instance, in the United States, which is the most affected country by the novel Coronavirus (nearly six million cases in August), the change in trading habits is clearly evident.
Rising unemployment rates are the biggest driver behind changing trading habits
One of the golden rules of trading is that you never trade with money you can’t afford to lose. It doesn’t matter if it’s on the stock market or the Forex exchange market.
By spending a long time choosing the right trading strategy and planning your investments wisely, you can lower the risk of loss considerably. But there’s still no such thing as risk-free trading. After the lock down, many non-essential businesses were forced to lay off part of their personnel. This has led to record unemployment rates.
According to data from the Pew Research Center, the unemployment rate rose from only 3.8% in February to 13% in May. In just three months, unemployment rose higher than it did in two years during the Great Recession. This unfortunate situation left people scrambling for cash. It’s been especially true for those who had lucrative jobs in sectors that took a big hit. Think hospitality and aviation. Therefore, it comes as no surprise that all these unemployed people stopped spending money on everything that wasn’t essential.
Risk-averse beginners are looking for traditional investments
Even if you were one of the lucky Americans who got to keep their job and didn’t have their salary cut, chances are you’re one of the many people who changed their spending and saving habits. A growing percentage of Americans say that they don’t know what the future holds. And for the time being, they’re trying to spend less, and save more. And if they invest, they’d rather invest in traditional investment vehicles, such as mutual funds, exchange-traded funds (ETFs), and annuities.
Some experts argue, however, that this is just a short-term trend. They believe that soon after the economy begins to recover, Americans will spend and invest even more to make up for this pause. Whether that will happen remains to be seen. But until then, if you’re not comfortable with alternative investments, it’s best to focus on the traditional ones instead. Needless to say, experts recommend that if you don’t already have an emergency fund, opening one should be a top priority.
Experienced investors are using the crisis to boost their earnings
While most Americans are cautious and press pause on their investments, not everyone is scared of the COVID-19 crisis and a potential recession. The US also has many experienced investors. Many have been trading Forex for many years now, either through US brokers or non-US ones. For them, an economic crisis isn’t so much a reason to stop, but a reason to invest and use their knowledge to anticipate the next moves of the market to make a profit later on. Granted, there aren’t that many investors who can do that. But for those who do, this is a lucrative period.
In general, recessions aren’t for day traders who are used to making a profit every day and want to multiply their money right now, not in the future. However, they’re a massive opportunity for swing traders and position traders. They have long-term plans, from several weeks up to several years. They also adhere to fundamental trading principles and know how to analyze economic models.
Needless to say, it takes quite a few years to develop this kind of experience. But those who have it are less likely to feel stressed by the pandemic. Traders who experienced the last recession, for example, are already familiar with the patterns and have an idea of how things will play out. Even though there are variations here and there, the principles of technical analysis say that price movements can be predicted by interpreting historical price charts and market statistics.
Where do we go from here?
What’s in store for the Forex trading market after the pandemic? Since this is an ongoing situation, no one can say for sure how the market will fluctuate, at least not in the short term. Until a vaccine is found and the world returns to normality, uncertainty will be part of daily life. As an investor, it’s up to you if you want to live with that.
As a general rule, you should start trading during a recession only if you have disposable income. You also must be totally comfortable with your financial situation. Otherwise, it’s best to alternate between beefing up your savings account and using traditional investment vehicles.
As for existing traders, encountering a recession might be a good occasion to reevaluate your trading strategy. Depending on your financial situation and risk appetite, you may want to switch from short-term strategies like day trading to more long-term ones. Swing and position trading are examples.
But, no matter what preferences you have, there’s one universal piece of advice that should appeal to everyone. Always keep your cool and don’t let emotions make decisions for you. During a recession, it’s normal for prices to fluctuate. If you can’t stay calm and wait it out, then no one will blame you for switching to safer investments for the time being. Be careful when reading the news, too. Staying informed is one thing. But checking tweets every few minutes can push you to make rash decisions.