3 minute read

What Do Tumultuous Economic Times Mean for Currency Trading?

Market Volatility    3 minute read

What Do Tumultuous Economic Times Mean for Currency Trading?

Beyond those in the currency trading world, many people may not realise that daily trading volumes tend to fluctuate in line with the prevailing economic climate. The volumes peaked at in excess of $6trn in the autumn of 2014, for example, as the economy began to take significant strides after a sustained period of decline and stagnation. Conversely, trading volumes declined to $5.1trn as economic uncertainty returned last year, and this underlines the typical investors’ dwindling appetite for risk as the climate worsens.

While currency trading may be marginally less popular during times of economic hardship, however, it still offers immense opportunity and growth potential to specific types of investor. The question that remains is: how does a challenging economic climate impacts on the forex market and those who continue to trade currency on a regular basis?

Tumultuous Times

In terms of how a tumultuous economic and geopolitical climate impacts on the forex market, one can gain insight by studying the real-time examples. The spectre of Brexit caused the sustained devaluation of the pound, for example, while it has also had a largely negative impact on the euro. Aside from brief periods of recovery, both of these currencies continue to trade in narrow ranges, while the escalating geopolitical conflicts between the US, Russia and North Korea are creating further uncertainty and less opportunity for growth.

Now, even though the US dollar has also been impacted by these issues (and President Trump’s preference for a weaker currency), it continues to largely outperform its major rivals. This has created an opportunity for currency traders to gain leverage in the forex market and enjoy short-term gains, primarily by investing in USD/GBP and speculating that the value of the pound will decline further. This highlights the fact that, even as macroeconomic and geopolitical factors drive uncertainty, it is still possible to achieve a profit through currency trading.

The increased risk factor does alter the challenge facing those in the currency trading world, however, while making it entirely unsuitable for inexperienced investors with an aversion to risk. After all, the forex market is also a volatile entity, and one that tends to see multiple price shifts within single, 24-hour trading periods. Economic tumult only increases this existing level of volatility, meaning that only those with a strong appetite for risk and a keen sense of determinism should consider trading currency when the climate is challenging.

The Risk and Reward of Trading Forex in a Difficult Economy

Beyond this, investors who trade currency in a depreciating climate must also keep other considerations in mind. Firstly, they should adopt the type of short-term outlook that characterises day traders, as this enables them to open and close profitable positions that capitalise on sudden trends.

Similarly, they should also adapt their approach to stop-loss orders, as they look to change the predetermined points at which positions are closed. There is always the potential to lose more in a volatile economy, so traders should negate this by establishing slightly more conservative thresholds that maximise their returns during difficult times.

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