With the recent news that the UK economy has, for the first time in 11 years, officially slipped into a state of recession, the markets have been in somewhat of a state of chaos over the last few days. To a certain extent, this news was to be expected. Forex traders have been anticipating the onset of a recession since the pandemic first broke out.
And although you might have read reviews and numerous trading guides on what this means for your portfolio, what does the onset of the recession mean for the forex markets more generally?
Firstly, we need to be clear about what a recession actually is. Technically speaking, the term ‘recession’ is used to refer to two or more consecutive quarters of negative economic growth. Usually, that is measured using GDP, although realistically some other technical indicators will be used to figure this out, such as unemployment rates or job creation figures.
Generally, recessions will last for several quarters and, more often than not, a number of years. But what does this mean for the average forex trader? Does slipping into a recession mean now is the time to sell off all your assets, pulling out everything you have invested into the market before the prices go any lower?
Ultimately, that will depend on several factors. However, the general wisdom is that just because the economy has posted negative economic growth figures, that does not necessarily mean the only option to protect yourself from further losses is to pull all of your assets out of the market.
Quite the opposite is true. If the economy has slipped into negative growth, this is now the time to ‘go long’ with your investments. That means holding onto them until the health of the economy improves. Historically speaking, recessions do not last forever and the economy will eventually grow again. Consequently, any investments you have made, regardless of the asset class, will in the future increase in value, possibly higher than when the recession first struck.
For traders with cash reserves on hand, a recession is a great time to invest more resources as assets will have temporarily decreased in value. When the market does pick up speed again, this means the assets you bought at a reduced rate during the recession will be worth much more.
For currency traders specifically, a period of recession can also be a great time to trade as the markets will be very volatile. While volatility is often thought of in a negative light, for skilled traders, the opposite is true. Experienced forex traders use market volatility to do ‘swing trades’, which is a standard method used during shorter periods of recession. More prolonged recessions, however, might demand a different approach, for example, by investing more in safe-haven assets.