Forex traders' guide to dealing with economic recession

As concerns about upcoming economic recessions rise, worries are increasing not only among traders but also among politicians, economists, bankers, and other individuals. This article explores the best strategies for Forex traders during economic recessions and ways to protect investments.

What is an Economic Recession and Why Should We Care?

An economic recession refers to a period of significant decline in economic activities lasting more than six months, accompanied by a reduction in Gross Domestic Product (GDP), increased unemployment, lower consumption, and a drop in business activities. Over the past three decades, the world has faced several major economic crises, each with its own specific challenges.

For instance, the 2008 financial crisis, which began with the collapse of the housing market in the U.S., led to a stock market crash and a drop in oil prices. The 2012 European debt crisis and the recession caused by the COVID-19 pandemic in 2020 are other examples of global recessions.

What Impact Does a Recession Have on Different Markets?

For those involved in stock or commodity markets like oil, a recession can pose serious risks. Stock values can significantly decrease, and demand for commodities drops, leading to lower prices. However, for Forex traders, a recession is typically a lesser threat. Currencies, during times of crisis, still maintain high liquidity, and currency fluctuations can create new opportunities. Nevertheless, during recessions, market volatility increases, making it essential to exercise extra caution.

Is a Recession Imminent?

Many analysts believe that between 2025 and 2027, a global recession may occur, affecting major economies like the U.S., European Union, and China. In the U.S., the recession could stem from slow economic growth caused by inflation and high interest rates, making loans more difficult and slowing economic progress. The EU is also facing energy market challenges and external pressures, which could lead to a recession. Factory and automotive plant shutdowns in Germany are also concerning. China, as one of the world’s largest economies, may face a recession if it fails to address its internal challenges.

How Can We Protect Our Assets?

During economic crises, investors seek assets that can protect against value depreciation. In the Forex market, currencies like the Swiss Franc, Japanese Yen, and U.S. Dollar are generally more resilient during crises because they tend to maintain their value in global instability. Gold is also considered a safe haven that typically increases in value during economic recessions. Ahead of the U.S. elections, gold is showing significant growth, and traders are paying close attention to it.

How Can We Protect Our Investments During a Recession?

Economic recessions are characterized by high volatility and low liquidity. To protect assets, consider the following strategies:

Diversify Your Portfolio

Spread your assets across different types, such as currency pairs, metals, and indices, to reduce the impact of the recession on your portfolio.

Reduce Trading Volume

During periods of high volatility, trade with smaller volumes to minimize risks.

Use Stop-Loss and Take-Profit Orders

These orders help control losses and secure profits.

Focus on Liquid Currency Pairs

Focus on currency pairs like EUR/USD and USD/JPY, which tend to be more stable during crises. With these strategies, you can protect your investments and even find profitable trading opportunities during a recession.

Conclusion

Risk management during an economic recession is crucial, but with the right strategies, investments can be protected, and new opportunities can be seized. By staying alert, understanding market conditions, and maintaining composure, you can succeed even during the most challenging recessionary periods.