In 2008, the world experienced the worst financial crisis since the depression of the 1930s. In response to the decline, the central banks lowered interest rates to stimulate lending, and started printing money in the form of quantitative easing program. These measures helped the economies of the developed countries to grow and in response, global stocks rose. In fact, all the major indices in Asia, Europe, and United States rose by triple digits.
However, markets do not go up forever. There is recent evidence that points to slowing economies. This year, central banks and leading organizations like the International Monetary Fund and the World Bank have lowered their economic forecasts.
By looking at the economic calendar, there is evidence that a slow growth environment is the ‘new normal’. The global manufacturing PMI has declined to almost 50 while inflation remains significantly lower. In China, exports have shrunk while the Q4 growth was 6.3%. In the US, the economy is expected to grow by slightly over 2.0% this year after growing by 4.2% in the second quarter of 2018. The same trend will be seen in Europe, where Italy is currently in a recession.
As a trader, this should not worry you. This is because, unlike long-term investors, you are not fully invested in the market. Instead, you observe the market, open trades in either direction and exit when you make a profit. For long-term investors, a slowdown could mean losses for their portfolio. In other words, the volatility that comes during economic slowdowns is viewed favorably by short term traders. So if you’re trading online, how can you take advantage of these conditions?
First, you need to pay close attention to market volatility, using the CBOE volatility index, often known as the fear index. In good times, the index is usually flat and close to zero. When there is a lot of volatility, the index is usually higher. The importance of observing this index is that it is based on the options market, which shows how the smart money is pricing for the future.
Second, you need to prevent a situation where you leave your trades overnight. Today, the global financial market has become highly synchronized. What happens in the US, will have an impact in Asia. Since you don’t know what will happen when you are asleep, it is recommended that you avoid leaving trades overnight. If you do, you increase your chances of losing money.
Third, you need to be conservative. For example, you can trade using lower lot sizes or volumes. When you use small lot sizes, you will make less money, but it will also help you protect your account. Similarly, you should be careful with the leverage that you use.
Fourth, you need to protect all your trades with a stop loss. A stop loss closes your trades the price reaches a certain predetermined place. You can alternatively use a trailing stop loss, which moves together with the price. Unlike a normal stop loss, this one locks-in your profits. For example, Easymarkets offers a free, guaranteed stop loss as a standard account feature.
Finally, you should use the price action strategy, where you follow the movement of the asset. This approach will help you identify good entry prices and follow them to the end.
In conclusion, a slowing economy does not mean less losses if you are a trader, because you are less focused about the global economy. Instead, you are focused on the day-to-day movements in the market. Therefore, while you should follow the developments of the global economy, you should not let them affect your trading.