This is a repost of the March 2020 poll from our blog (now defunct):
The COVID-19 pandemic is wreaking havoc on people’s lives, on countries’ economies, and on financial markets. Yet, similarly to other world-scale events (like Brexit or the US political elections), it also offers opportunities to re-evaluate currency exchange rates of the affected economies, providing a reward to traders who manage to properly forecast the consequences of this global pestilence. However, along with profit potential, it brings elevated volatility to the market, ruining some strategies and crippling others.
There are multiple ways traders can respond to the COVID-19 pandemic in relation to their trading strategy. Here, we will review some of the basic ones:
Continue trading as usual. In an unlikely case when this global disaster doesn’t concern any of your trades, you might decide to do business as usual. Nonetheless, such approach may prove to be dangerous as the currency market’s response is chaotic, and the bursts of volatility can be very unpredictable. Even if some currency pair is showing normal stability now, it might switch to gaps and flash crashes tomorrow.
Take a break. This option seems to be the most attractive if you cannot wrap your head around how currencies could react to coronavirus related news. Unfortunately, it means that you give up your normal FX trading earnings. Of course, if you are only beginning to trade and not yet consistently profitable, this might be the best option. It would be also preferable to sit this out if you trade based only on technical indicators as the market reactions to the COVID-19 news might be ruining many TA norms.
Buy JPY and other safe haven currencies. On the one hand, this seems logical since such currencies as the Japanese yen and Swiss franc are going to benefit from their status as a refuge assets during the global economical turmoil caused by the pandemic. On the other hand, both Japan and Switzerland are already strongly affected by the COVID-19 disease. This strategy needs a very careful analysis of situation in the safe have currency’s country.
Sell currencies of countries heavily hit by the epidemic. This one can be combined with the strategy of going long on safe haven currencies. The problem is that the safe haven currency’s country might end up being the one heavily hit by the epidemic. If you choose to follow this path, you need to rigorously analyze each country’s situation — this might be beyond the abilities of an average retail Forex trader.
Start paying attention to COVID-19 related gossips. Monitoring the latest news and gossips (via Twitter for example) can be useful in this situation. You could then apply the knowledge (or at least the popular misconceptions) as a sort of sentiment analysis to place a trade or exit one. However, it is often difficult to understand what effect this or that perceived development is going to have.
Switching to cryptocurrencies. If the rapid and deep falls and rallies in currencies seem too small for you, you can switch to cryptocurrencies for even wilder volatility. Crypto trading is especially well fitting for the times of COVID-19 pandemic due to the lack of weekend gaps. Moreover, you can continue to trade impactful news even on Saturday and Sunday when the traditional foreign exchange market is closed.
I am going to reduce my own trades based on technical analysis strategies and try to open positions into some long-term developments linked to the spread of COVID-19, but I am not sure that going long the usual safe heaven currencies is the right thing to do here. And what is your opinion?
If you would like to share details on how you deal with COVID-19 effects on FX trading, please feel free to use post below.
The COVID-19 pandemic is wreaking havoc on people’s lives, on countries’ economies, and on financial markets. Yet, similarly to other world-scale events (like Brexit or the US political elections), it also offers opportunities to re-evaluate currency exchange rates of the affected economies, providing a reward to traders who manage to properly forecast the consequences of this global pestilence. However, along with profit potential, it brings elevated volatility to the market, ruining some strategies and crippling others.
There are multiple ways traders can respond to the COVID-19 pandemic in relation to their trading strategy. Here, we will review some of the basic ones:
Continue trading as usual. In an unlikely case when this global disaster doesn’t concern any of your trades, you might decide to do business as usual. Nonetheless, such approach may prove to be dangerous as the currency market’s response is chaotic, and the bursts of volatility can be very unpredictable. Even if some currency pair is showing normal stability now, it might switch to gaps and flash crashes tomorrow.
Take a break. This option seems to be the most attractive if you cannot wrap your head around how currencies could react to coronavirus related news. Unfortunately, it means that you give up your normal FX trading earnings. Of course, if you are only beginning to trade and not yet consistently profitable, this might be the best option. It would be also preferable to sit this out if you trade based only on technical indicators as the market reactions to the COVID-19 news might be ruining many TA norms.
Buy JPY and other safe haven currencies. On the one hand, this seems logical since such currencies as the Japanese yen and Swiss franc are going to benefit from their status as a refuge assets during the global economical turmoil caused by the pandemic. On the other hand, both Japan and Switzerland are already strongly affected by the COVID-19 disease. This strategy needs a very careful analysis of situation in the safe have currency’s country.
Sell currencies of countries heavily hit by the epidemic. This one can be combined with the strategy of going long on safe haven currencies. The problem is that the safe haven currency’s country might end up being the one heavily hit by the epidemic. If you choose to follow this path, you need to rigorously analyze each country’s situation — this might be beyond the abilities of an average retail Forex trader.
Start paying attention to COVID-19 related gossips. Monitoring the latest news and gossips (via Twitter for example) can be useful in this situation. You could then apply the knowledge (or at least the popular misconceptions) as a sort of sentiment analysis to place a trade or exit one. However, it is often difficult to understand what effect this or that perceived development is going to have.
Switching to cryptocurrencies. If the rapid and deep falls and rallies in currencies seem too small for you, you can switch to cryptocurrencies for even wilder volatility. Crypto trading is especially well fitting for the times of COVID-19 pandemic due to the lack of weekend gaps. Moreover, you can continue to trade impactful news even on Saturday and Sunday when the traditional foreign exchange market is closed.
I am going to reduce my own trades based on technical analysis strategies and try to open positions into some long-term developments linked to the spread of COVID-19, but I am not sure that going long the usual safe heaven currencies is the right thing to do here. And what is your opinion?
If you would like to share details on how you deal with COVID-19 effects on FX trading, please feel free to use post below.