COVID-19’s Effect on the World and the Forex Market
According to the World Health Organization (WHO), cases of pneumonia of unknown cause emerged in Wuhan City, China, on 31 December 2019. A novel coronavirus was identified as the cause by Chinese authorities on 7 January 2020 and was temporarily named ‘2019-nCoV’. The WHO, however, officially announced ‘COVID-19’ as the name of this new disease on 11 February 2020.
Initially, China led the world concerning total cases, though in recent weeks the United States surpassed China, reaching 435,160 total cases, with Spain, Italy, and Germany trailing behind.
COVID-19’s impact has taken its toll on the global economy with investors transitioning from concern to panic. Volatility levels have increased exponentially across foreign exchange (the Forex market), a direct consequence of the volatile movement seen in global stock markets due to government intervention.
March witnessed downside pressure on Wall Street trip circuit breakers, temporarily halting trade in the S&P 500. This is the level where NYSE rules stipulate a 15-minute trading halt aimed at soothing volatility – a key level put in place to limit sharp sell-offs. Mid-March also observed the US Federal Reserve, in an emergency move, slash interest rates by 100bps in response to the outbreak, targeting a range of 0-0.25% – the largest emergency reduction in the Fed’s history.
Failed OPEC talks in early March also contributed to volatility in global oil prices. The poor outlook in the oil industry is having a dramatic effect on the currencies of countries that export oil and gas. Currencies such as the Mexican Peso (MXN), Norwegian Krone (NOK), Russian Ruble (RUB), and Brazilian Real (BRL) are clearly feeling the impact of OPEC+ uncertainty.
In addition to the above, a lack of cash flow and liquidity generates serious dilemmas between continuing to pay workers or putting them on furlough, putting stress on social safety nets, and further strain on currencies around the world. While COVID-19 is likely one of the most significant events in our lifetimes, it presents an opportunity for profitable Forex trading.
Volatility levels are set to remain over the course of the coronavirus pandemic. Therefore, the research team at FP Markets has assembled a number of key points to be aware of during these unprecedented times.
- The Average True Range (ATR), a volatility indicator showing how much a market moves, is one measure traders can use to calculate volatility levels. Perhaps the simplest measurement of price volatility, though, are Bollinger Bands, using a standard deviation calculation, and Keltner Channels. If you haven’t already, the said indicators may be worthwhile additions to your trading strategies.
- Short-selling risk assets will, of course, be of interest to traders. As long as position risk is contained to appropriate levels, this can be a lucrative approach. Clear support-turned-resistance levels, a price action-based approach within the field of technical analysis, offers traders one platform to consider short positions from. However, support and resistance levels can and do, give way, and in times of high volatility can also experience wide-ranging whipsaws, sometimes referred to as stop-runs. Do bear in mind, though, many traders will also look for converging structure (trade confluence at support/resistance levels), rarely relying on one trading metric to base decisions.
- In an unprecedented crisis, no one is sure what to expect from economic reports, such as US unemployment data and the purchasing managers’ index (PMI). Traders, therefore, tend to avoid trading around news time.
- Risk management strategies will call for an adjustment to trading setups to suit current market conditions. Reducing the size of positions and reliance on leverage, while widening stop-loss points to allow trades more room to breathe, are essential steps prudent traders may consider.
- While times of increased volatility may appear an ideal opportunity to execute larger-than-usual positions, this can, and usually does, end unfavorably. This is gambling. Successful Forex trading requires robust emotional control. Emotional trading seldom works and can be disastrous in volatile markets.
Financial markets are reflections of the societies they spring from. When global markets experience upheaval, almost all types of investment vehicles experience vigorous movement – ETFs, CFDs, stocks, bonds, and commodities (gold), for example.
COVID-19 has given rise to increased volatility across global financial markets, with equity markets recently plunging into bearish territory. However, once the virus is contained, price levels are likely to form a bottom. Fortunately, in the Forex market, a bear market is just as tradeable as a bull market. Therefore, ample opportunity to engage is there as long as traders incorporate robust risk-management principles.
Staying calm and collected is a challenge for most Forex traders during times of volatility. The fear of missing out can give rise to emotional trades – social media also tends to exacerbate the issue.
In all market conditions, professional traders trade according to their strategy, not their feelings. Sometimes no trade is the best trade you can make. There will always be another trade – taking the emotion out of trading is key in any trading strategy.