- Joseph Barreca
Is The Forex Market Recession Proof? These 4 Reasons May Shock You!
Updated: May 31, 2022
me traders say forex trading is not ideal during bad economic times, while others disagree. This leaves the question - is the forex market recession proof?
What Is The Forex Market?
If you are a regular here at the Global Institute Of Trading, it’s safe to say you’d quite familiar with the forex market. But let’s quickly recap…..
The forex market (or foreign exchange market) is a financial market where forex traders and institutions trade one currency against another.
Forex trading is risky and without proper risk management, most traders eventually lose all their money. While having its cons, forex trading can turn out to be an investment strategy that secures your finances during business cycles or recessions.
What Is A Recession Proof Market?
A market can be regarded as recession proof when it is unaffected by a recession and offers good investment and trading opportunities during a negative economic cycle.
Various markets react differently to a recession; non-recession-proof industries like real estate and cyclical stocks are some examples. Assets belonging to those classes perform poorly during economic contraction. While the forex market, defensive stocks, and some other assets can possibly remain unaffected.
Reasons The Forex Market Could Be Recession Proof
Although there are several reasons why the foreign exchange could be recession proof, let us address four of these possible reasons.
1. It functions just fine during disasters
This is the most intriguing aspect of the Foreign Exchange Market because it is immune to catastrophic events. A good example is the COVID-19 pandemic that started in 2020.
During the pandemic, the stock market crashed by more than 30%. There was a global scale of unemployment, and many businesses were forced to close down or cease operations. Regardless of all those happenings, the foreign exchange market was still perfectly operational and running quicker than usual.
This goes to show that if businesses, employment, and the stock market cease to exist, people can still profit from the foreign exchange market. However, this is as long as they have a profitable trading strategy.
2. Highly volatile swings
To some traders, a recession is the best time to trade a foreign currency. The foreign exchange market is volatile on a good day. Nevertheless, when mixed with an economic turmoil, the foreign exchange market becomes more volatile.
With the right trading strategy and a proper understanding of fundamental analysis, bad news can be converted to good news. A good trader can ride through an economic wave, and make good profits within a short time frame.
3. Bear markets are profitable!
In the stock exchange market, if a certain corporation performs well, their stock prices increase. Holders of those stocks make a profit as the price goes up, and this can sometimes be referred to as a bull market. In a bear market, when prices of stocks start declining, holders can take heavy losses if they do not sell off their holdings.
The foreign exchange market is a bit different, unlike the stock exchange market because currency pairs are traded. This implies that you anticipate one currency to outperform the other at a particular point in time, and if your forecast is correct you will make profits.
For instance, you’re trading EURJPY (Euro against the Japanese Yen). You notice that the Japanese Yen is showing continuous weakness and you are confident that the value of the Japanese Yen will continue to decline, while the Euro remains stable. You can easily take a long position (Buy) on EURJPY with a good entry if your forecast is correct and the Japanese Yen remains bearish. You will get a good trade.
4. Endless trading opportunities
The forex exchange market continues to present opportunities to traders regardless of any economic situation. During difficult times some currency pairs and assets perform well, a good example is GOLD. This asset has traditionally been seen as the go-to asset during an extended recession or economic decline.
Regardless of the global economic situation, there will always be good opportunities in the foreign exchange market. You may deposit your wealth in secure assets like silver or gold if you are in search of a good store of value.
Some countries’ economies perform better than others at various periods. If there is a decline in the economy of a country, other countries’ economies will still perform well. And if various economies are declining, you can rest assured that they won’t all decline at once. This factor gives traders lots of options and opportunities to make handsome profits.
So..... Is the Forex Market Recession Proof?
I think it is pretty safe to say – YES, the forex market is recession proof. The reasons mentioned will enforce the importance of having the right strategy and risk management in place during bad economic times but also show that these times can present some very big opportunities.
It’s never a guarantee that one will make money in the forex market. Much the same as anything in life that’s worth doing, to be profitable a profitable forex trader you will need to put in the time and effort to learn the fundamentals and get in and get your hands dirty!
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