How does the pandemic affect international financial markets and how should you trade in the current age of uncertainty? These are not the only questions that we will try to answer in this article. Read this piece to learn how you could possibly adjust your trading techniques to the coronavirus epidemic.
What’s going on?
Coronavirus has affected the global financial markets in several ways. It is hard to tell now, when the epidemic is not yet over, to what extent, but it definitely did. The S&P 500 has lost over a third of its value between February 19 and March 23. Dow Jones Industrial Average has lost even more (up to 36%) over the same period of time. Although back to growth, both metrics indicate a disruption of tremendous scale in the global economy, not seen in the last 5 years. More than that, economic consequences of the world’s latest pandemic may not be limited to that. There could be yet undiscovered or delayed effects that will be brought to light later.
Despite the recent recovery there is still a chance for a full-fledged financial crisis to be triggered by the economic slowdown in China, the United States and Europe. It is quite likely that the global GDP in the current year will take a hit.
What to expect?
According to Roland Berger, an independent European consulting agency, the ‘Fast Recovery’ scenario is out of the question already. Their specialists also believe that the disruption will last from 4 to 12 weeks. China is further along the coronavirus curve, its economy is back on track (at least, according to the Chinese government itself). Europe and the United States, on the other hand, are yet to fully understand the effects of COVID-19. Their recovery will take some time.
Certain industries will be hit even more than the economy in general. Airlines, tourism and retail (excluding FMCG) will take the beating. The same applies to the automotive, logistics and oil/gas industries. Financial services, on the contrary, will be much less affected. Still, the consequences of the pandemic will be felt by all industries to a certain extent. It will definitely take the global economy some time to get back on track.
Roland Berger specialists also believe that in the worst-case scenario the epidemic will trigger a global crisis. In this case, the GDP will demonstrate 0.3% growth in China in 2020 and shrink by 9.3% in Europe and 10.4% in the United States. No matter what scenario will hold true, it is a trader’s obligation to be prepared for whatever is coming.
How to adjust your strategy?
Now, when you know that the coronavirus outbreak is affecting the global economy in several ways, how could you possibly adjust your trading strategy? As a trader, you should know how to manage your trading capital and speculate on the volatility.
It is worth remembering that the markets are much more sensitive to the negative news right now. Any sign of poor financial performance can alter the investors and send the asset into the dive.
Here is what you may do while trading CFDs on stocks during the pandemic:
- Closely follow all news, associated with a particular company. Now, when the level of uncertainty is particularly high, all negative announcements can be detrimental to the stock price. For certain sectors, mass layoffs and negative growth can be expected.
- You may watch out for companies with strong fundamentals and a falling price as they have the potential for a recovery.
- You may consider opening short positions for companies that you know will depreciate in price.
- You may closely follow all news, associated with a particular country. Growing COVID-19 presence can negatively affect the exchange rate of national currencies of affected countries, not necessarily due to its demographic consequences but rather through the means of economic stagnation.
- You might consider trading currencies of countries, not affected by the epidemic.
No matter what trading technique you use and how you adjust it to the recent events, it is important to comply with basic risk management rules. For example, you may avoid allocating more than 2% of your trading capital.
It is also important to keep your emotions in check. Do not forget the principles postulated by Benjamin Graham in his book “The Intelligent Investor”. According to these principles, the intelligent investor doesn’t rush to sell during the crisis and hesitates to buy during the boom. What we see now is a clear example of the former — a lot of people panic-sell their assets, which is a suboptimal strategy during the downturn. In accordance with the “buy low, sell high” principle, a downturn might be a good opportunity for investors to buy the assets of their choice with a discount. This is something worth remembering when opening deals on the platform.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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