Forex Trading: Forex Trading and Economic Depression

Forex Trading: Forex Trading and Economic Depression

As you may know, economic factors are one of the key categories affecting the forex market. When there are major economic news or events that occur, the forex market is significantly impacted and we see a lot of fluctuations across all affected countries. One of such events is an economic depression. An economic depression is a severe form of economic recession that is over a very long period of time, and forex traders should be aware of how to react when such economic events occur in real life.

How would an economic depression affect Forex Trading?

Firstly, when the country is facing an economic depression, the value of the currency is weaker comparative to other countries. This is due to the fact that the country has not been doing well in recent years, and that the Gross Domestic Product has been declining over the past few years. At the same time, the weakened currency will also cause investors to be less confident in the economy of the country, and thus pull out their investments from the country. This is a cascading effect; a weakened currency will see investments pulling out, weakening it even further.

This weakened value would also cause more volatility in the Forex markets as there is more uncertainty, and more risk aversion when it comes to the country’s currency. As more news are released, there will be more fluctuations as the traders are more sensitive during this period and thus have a bigger reaction when the news are released

Secondly, the country’s central bank might lower interest rates to stimulate economic activity, but because interest rates are lowered, foreign investors may look elsewhere that has higher interest rates that can give them higher returns. A lowering of interest rates can thus affect forex trading as investors would sell the country’s currency in favour of other countries that have better interest rates.

Thirdly, an economic depression would also mean that the trading volume pertaining to that country’s currency would fall. Purchases naturally drop as a result of an economic depression because people are more risk adverse, but what they do not also know is that investments also diminish during this period due to people being more risk adverse. Businesses would purchase lesser stock and materials, reducing their total output to conserve money as well instead of investing in more materials in a bid to increase sales to increase revenue during this period.

What can traders do to protect themselves during this period?

Instead of prioritizing quantity of trades, traders could focus on quality trades, or setups that have a higher probability of success. There are many traders out there that enter very speculative positions, and such a mindset is not good for them in an economic depression. What is recommended instead is to focus on quality trades, so that you can protect your capital during forex trading

Another thing traders can do would be to focus more on risk management strategies. Risk management has and will always be an important component of forex trading. To skimp on risk management in an economic depression where the markets are less predictable can cause a trader to lose everything. Remember, forex trading is a form of investment, not a form of gambling. It is important for us traders to mitigate potential losses while securing profits when we can.

Last but not least, traders can choose not to participate in Forex Trading during this period of time. If traders are not confident to trade during an economic depression, they should not force themselves to trade as they will be emotionally and psychologically affected. The Forex market will always be there for you to trade, and abstaining from trading during this period of time can help you mitigate potential losses that would occur during trading.

As you may have realized, an economic depression can be a trying time for traders due to the volatility and unpredictability of the forex market. It is not uncommon for many traders to lose all their money during this period as they over speculate and over trade during this period. It is thus important to understand what will happen during this period of economic recession, and what are your best options available so that you can minimize potential losses, and profit from the market.