Forex Trading During a World Crisis

19.03.2020

There are times when markets are really wild and crazy. Some will tell you these are the times to stand aside. Yet there is a way to trade these markets profitably – you just have to change your thinking and understand what is going on.
 
Normal, Crisis, or “Normal Crisis”?
Human beings have two patterns of behavior. The first pattern is the normal set of rules for day to day life. The second mode is crisis mode, when normal rules completely break down and we have to start to think in a different way if we want to survive. Crises are rare, so we often forget about them and start to think they are rarer than they really are.
It is very difficult for most people to make the mental change between “normal” and “crisis” until they see the danger coming right at them. This was enough for our ancestors, who had to worry about being killed by a charging wild animal during hunting, or by a warrior from a rival tribe. For modern humans, though, it is not enough – we face dangers that cannot be “seen” up close until it is too late, even though we have the intellectual tools to understand them and the technology to beat them. The coronavirus pandemic of 2020 is an excellent example of this – the pandemic might have been stopped in China, but people and governments acted too little too late, even though they knew what could happen if they didn’t act. This is probably because such a pandemic had not been seen within living memory in the western world, and so people just couldn’t believe that it would really happen, even though there are institutes and scientists working every day to warn people that it was only a matter of time before it happened.
As financial markets are driven by human buyers and sellers, financial markets also operate in two modes – “normal” markets and “crisis” markets. To be successful in the market, a trader must be able to know when markets are driven by a crisis and whether there’s reason to panic or it’s just a small crisis. Then, the successful trader needs to apply different trading rules to each different type of market. It is important to differentiate between a relatively small crisis and a true panic, which I will call a “world crisis”. Good examples of true world crises within the past century are the Financial Crisis of 2007-2008, the Cuban Missile Crisis of 1962, the Second World War from 1939 to 1945, and the Coronavirus Pandemic of 2020.
Forex Market During Crisis
How Do You Know When it’s a World Crisis?
There are two simple rules to use that will tell you whether you are in a real “world crisis” or just a more normal smaller crisis. The first rule is, are markets moving consistently with abnormally high volatility? You can measure this by applying the average true range indicator over the long term and comparing it to the recent daily ranges of stock, Forex, and commodity markets. If the current ranges persist for several days at levels far above their long-term averages, and stock markets are mostly going down, then it is obvious that a major crisis is going on.
The second rule is not mathematical, it is emotional – is everyone you know who follows the news saying in fear “Oh, I can’t believe this is actually happening, it can’t be real”? When you have aware people talking like this and crashing stock markets on very high volatility, you have a true world crisis.
How to Trade a World Crisis
Trading Forex, stocks, or commodities during a world crisis is very dangerous, but also potentially extremely profitable. Here are ten great rules a trader in a world crisis should follow to not only be profitable, but also to avoid completely blowing up their trading account:

  • Expect market moves each day to be at least as big as the biggest daily move so far since the crisis began.

  • It is totally possible for a stock market to fall by 50% within just a few days.

  • A world crisis is the only time when it makes sense to short stock markets. During more normal, moderate crises, short sellers tend to find themselves trapped by dip buyers.

  • The part of a world crisis which gives the best trading opportunity is the first few weeks. In fact, the first days of the crisis is the very best time to open new trades.

  • Keep trade position sizes small. This is very, very important. It is tempting to open big trades as if you are right you will make a fortune. Don’t do it. Adjust down to factor in the very high volatility.

  • Keep stop losses tight, relative to the volatility. Don’t make the mistake of thinking that because the volatility is high, you need to make stops extra-wide to give your trades a chance to survive. It doesn’t matter if you lose trades if you keep your trade position sizes small, as even winning traders lose lots of trades.

  • Don’t pay any attention to support and resistance levels, even in Forex, as they will almost always be overpowered by the strong sentiment and general lack of liquidity. The only exception should be when the price has already made a very large move for the day, as large as a recent day’s average move, and is showing strong signs of reversing.

  • Don’t exit a trade too early by looking for profit targets. Wait for reversal price action, even if on a short time frame. If you try to pick exit targets, you will almost always be far too conservative and miss out on great profits on the winners – this is just human nature.

  • Don’t feel like you need to trade everything. It is probably enough to trade one major stock market index, one major commodity, and one Forex pair at any one time, although you might want to switch between them at times. Remember that market correlations are usually extremely high during a world crisis, so keep the total risk of three open trades in mind as well as the high volatility when you size your positions.

  • Don’t trade when you are feeling panicky! During a world crisis, you or people close to you might face danger. It is not easy to make a trading decision if you are worrying that your sneeze might be the start of coronavirus! If your mental health is suffering, take a break – there will be another great opportunity tomorrow.

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    What to Trade During a World Crisis?
    The best assets to trade during a world crisis are those which usually make strong directional moves, while maintaining at least enough liquidity to be tradable without serious problems. These are:

  • Major stock market indices such as the S&P 500, the Dow Jones Industrial Index, the DAX, or the Nikkei 225. Usually, it is best to trade one of the American ones short, until the crisis begins to end when these indices become long-term buys. The major American indices are the S&P 500 and the Dow Jones Industrial Index.

  • Crude oil, which should drop rapidly as it becomes clear that global economic demand is drastically ramping down.

  • Precious metals such as gold and silver may move strongly either down or up depending upon the nature of the crisis, this can be complicated so new traders are advised to leave these alone.

  • Forex currency pairs, which usually show little directional movement, can be some of the biggest movers of any asset in a world crisis, as central banks are forced to take drastic measures with monetary policy. Typically, a good strategy is to identify which countries are being hit hardest by the crisis, and be ready to short those currencies, while being long of the currencies which are most likely to act as “safe havens” (typically the Japanese Yen, the Swiss Franc, and the U.S. Dollar).

  • A Trading Strategy for a World Crisis
    Now that you know what to trade in a world crisis, and in what direction, how should you trade it? The best entry and exit method in markets with very high volatility, as you will see during a world crisis, is to use “hip” and “lop” Japanese candlestick patterns. This is explained in detail here, but it is important to know that you should wait for valid entry signals on both the hourly chart and then followed by the same on a shorter time frame chart such as the 15 minute or 5 minute before entering. You can then exit later when you get an opposite signal on a similar time frame.
    Finally, don’t forget to keep calm. All crises end eventually, but every crisis gives an opportunity to profit in the financial markets.

    Original from: www.dailyforex.com

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