What to Trade During the Crisis

1. Investing During Crisis
2. Consider Strategy Change
3. Best Investments During Financial Crisis
4. Bond Market During Financial Crisis
5. The Bottom Line

Forex trading involves risk on its own, financial crisis turns the Forex trading process into walking on the edge of a knife.

During a financial crisis panic steps in with its usual suspects; greed and fear - the great amplifiers - traders' human psychology usually is not subject to traditional financial theory, crisis only makes it worse.

Many people are trying to escape from financial investment in stocks during market crisis which is a big no-no, commonly known in the trading community, reason is simple the exchange may disallow short selling and off-market hours events, thus investors are left with their, second by second, depreciating stocks.

So when choosing what to trade: Stock or Forex. Decision comes down to which market is living through lesser restrictions during a crisis.

KEY TAKEAWAYS

• Crisis is not a novelty, though it is hard to predict when it will happen, it’s coming, thus having strategy ready beforehand the crisis should be ready.
• Taking a long-term approach in investing during crisis will pay off, particularly when investing in recovery.
• Having a diversified portfolio is crucial.

Investing During Crisis

Traders have to take risks into account while trading during crisis and accordingly make adjustments. These are costly points, if ignored.

• Leverage - consider reducing leverage. Even in normal market conditions leverage presents high risk, with a financial crisis hanging over trader’s head, trading with leverage is suicidal.
• Interest Rates - when a country's interest rates rise, its currency will strengthen (basically, money is more expensive), when interest rates fall, its currency will weaken (money is cheaper). Thus, during financial crisis, as a matter of principle money will become cheaper and investors will have to withdraw their investments.
• Transaction Risks are exchange rate risks associated with time differences between the beginning of a contract and when it settles. Forex trading occurs on a 24-hour basis, trading during economic crisis can result in exchange rates changing dramatically before trades have settled.
• Country Risk (optional though valid) - countries react differently to crisis regarding interest rates and of course, political climate - unstable political situations may and will affect Forex trading.
• Counterparty Risk - counterparty risk refers to the risk of default from the dealer or broker in a particular transaction.

Consider Strategy Change

• Switch from long term strategy to short term - due to highly unstable market behaviour
• Practise gradual entry
• Invest in crisis approach (warning, investing in crisis requires traders to have discipline, patience, and, of course, enough wealth in liquid assets available to make opportunistic purchases) - using low prices as a buying opportunity; fear drives asset prices well below their fundamental values, it’s a good investment, because eventually prices will return to expected levels.
• Apply aggressive exit strategy, acknowledge losses while they are bearable
• Stick with higher probability trades - refers to the likelihood of whether a trade will win or not, the market will move in unexpected ways and losses will happen especially during financial crisis.
• Diversify - refers to investing in a wide variety of stocks, bonds, and funds to balance out the risk.

Best Investments During Financial Crisis

It’s important to think long term, rather than trying to profit or cut losses now (meaning, at the beginning of the crisis). So what are the best investments during financial crisis?

• High quality companies with long history of success - relatively safest place to invest (though, you might come out winner out of the crisis, stil will carry weight of indulging even bigger monopolisation of the market)
• Consumer Staples (it’s referred to a set of essential products used by consumers) - probably the safest place to invest - customers will buy these types of products regardless of the economic situation at hand.
• Main economy branches - it might take a while and money, but recovery from financial crisis is promised. That is investing for the recovery.
• T-bonds - government issued debt securities, low risk and low or fixed dividends, backed up by government.
• Commodity Investing - another area of investment to consider during a recession. Commodities are a fundamentally different type of asset than stocks, their prices do not necessarily fall when the prices of stocks fall. And when the economy is in recession prices on commodities can drop, but since they are traded on a global basis, crisis won’t necessarily have direct impact on commodity prices.

Bond Market During Financial Crisis

Treasury bonds issued by the U.S. government are a safe investment, so safe that it’s advised to buy by people nearing retirement (keep in mind the 2007-2008, though). But the more secure bonds are, the lesser are dividends, it’s a rule.

• Muni bonds - instruments issued by local or state governments and tend to have low default rates. Investors are exempt from taxes, so tax-free municipal bonds are very appealing to those living in high-taxed areas. In theory it should recover from a crisis better than other types of bonds.
• Corporate bond yields are higher risk bonds, because they are corporate. But, as they say, the higher risk the higher reward, whether to invest or not, lies at the discretion and foresighting knowledge of the trader.
• Junk Bonds - carry a higher risk of default than most bonds issued by corporations or governments. Called junk bonds because they are released by companies who are at high risk of defaulting. These bonds are notable for most of the time recovering from a crisis, since demand for investments and desire to cut high dividends never ends.

The Bottom Line

The Bottom Line is for the last 50 years, recessions and depressions have happened 49 times all over the world. Point is that a crisis is unavoidable and for the next time it's better be prepared. History has shown us that people will act irrationally during crisis every single time and will stagger the economy even more.

But every crisis settles down, that’s why those traders who think rationally, disciplined, and have an understanding that, historically, markets have always rebounded from crisis can purchase assets at low prices (crisis prices) and earn excess returns later on.

Of course those with sure knowledge of where the price is going, can implement short strategies to profit from a falling market. Important thing is not to overhold short position or buying too early or too late.