How to effectively trade in forex during economic uncertainties
During economic uncertainties, traders tend to shy away from the forex market because most strategies they know involve the future direction of the markets. But some strategies can help traders weather such a climate. One example is the trend study that allows traders to formulate their strategies based on the market’s movement.
Editor’s note: This article originally appeared on trend.tokyo and was translated into English.
For most people, forex trading revolves around attempting to profit through anticipating the future direction of a market. But what most traders don’t know is that other strategies can help traders profit from the forex market without predicting the future direction of a currency pair.
In the financial markets, when something unknown and unpredictable surfaces, these markets are the first to react. The worse the news, the worse the market’s reaction. This is true, especially with the current situation we are experiencing right now due to the global pandemic, which pushed some markets to one of their lowest downturns.
Because of the coronavirus pandemic, the whole global economy is deemed to potentially face the world’s worst recession since the Great Depression. Because of this economic situation, the emerging markets currencies and the capital and economic growth projections also suggest further downtrend pressure. This trend means that the emerging forex markets will most likely remain weak in the coming months.
Some of the financial markets are still standing strong even during the coronavirus situation. This can be alarming, especially for forex traders who only rely on future predictions, but thankfully, there are sustainable trading strategies for traders to overcome volatile market situations.
Taking advantage of market inefficiencies
During volatile market situations, markets can be inefficient. That’s why traders can capitalize on such conditions even during downtrends. For example, traders can use arbitrage strategy as part of their trading plan. Arbitrage is the simultaneous buying and selling of assets such as forex in different exchanges, profiting from its price differential. Arbitrage takes advantage of market inefficiencies and profits from them.
According to a study published in Victoria Graduate School of Business, “with the constantly changing supply and demand, the spot and forward currency markets are not always in a state of equilibrium. When the markets are imbalanced, the potential for risk-free or arbitrage profit exists” The more volatile the market, the higher the possibility of finding arbitrage opportunities across the forex market.
Because of the volatility of the forex markets through supply and demand, currency mispricing is evident due to constant changes in currency pairs across global markets. Some platforms can’t keep up with the changing figures of each currency fast enough, opening the way for mispricing through exchanges. Such occurrences are what we popularly know as market inefficiencies and arbitrage helps in alleviating these conditions.
Studying trends before trading
During economic uncertainties, it is best to study the trends in the market before trading. This can help traders predict what can happen in the future. The rise of the coronavirus transmission globally pushes traders to analyze its effects on specific markets before trading.
According to a report published by Regal Core Markets, a forex brokerage, “a trend study refers to analyzing the different trends occurring within a given market and capitalizing on the said trends. Currency pairs may either go on a Bullish (upward) or a Bearish (downward) trend. Traders, then, monitor the specific currency pair, relying on the predicted direction that the said pair is taking and making profits thereof.”
If traders don’t study a trend, they might end up losing all the money they have invested in the trade. This is because rash decisions can often lead to negative consequences, especially when trading. That’s why it is essential to study trends before making any trades.
According to Investopedia, “a trend is a tendency for prices to move in a particular direction over a period. Trends can be long term, short term, upward, downward and even sideways. Success with forex market investments is tied to the investor’s ability to identify trends and position themselves for profitable entry and exit points.”
With trend study, traders must observe and listen to the market sentiment by following news announcements and using technical analysis to help time entries and exits. Through this, traders can develop their rule-based system that is profitable and easy to execute.
Conclusion
The coronavirus pandemic has brought about economic uncertainties worldwide. It also has resulted in increased volatility of the forex markets. Some traders may shy away from forex trading during times like this, primarily because they don’t know the right strategies to weather the current economic climate. By following the strategies mentioned above, traders can now enjoy the forex market even during recessions.
Image credit: Pixabay
