A common definition of a recession is two consecutive quarters of economic decline. What are the characteristics of day trading during a recession? With reduced trading volume how does that affect your trading program? If your strategy is to follow market moves, how does that work when fewer folks are trading fewer shares?
People will debate the causes of the US financial meltdown for years. For the active day trader the question is not what happened but what will happen. How will a recession and possibly a depression affect your trading? What do you need to avoid and what do you need to do to make money during the economic hard times of a recession or world wide depression?
A Few Thoughts on Trading Volume, Program Accuracy, and Other Factors
The markets seem to contain equal parts of hope and despair these days. Trading activity jumps at morsels of good news and bad news. Then trading activity virtually disappears in a void of black mood.
Remember that there is psychology in trading. Remember that regardless of whether we are in a recession/depression there is still money to be made with thoughtful and timely execution of a sound trading plan.
Trading volume may dwindle as recession turns to depression. For the day trader it is important to know how your trading program deals with low volume and spikes of activity. Are there software updates to compensate for a possibly different mix of traders? Will fewer traders stick in?out during tough times? If so, which traders and will the new mix need an adjustment of your trading program?s software?
We’re already seeing signs of the same mistakes?made in?the 1930?s with erection of trade barriers by some nations. Sound consensus is that the Smoot Hawley Tariff Act erecting trade barriers helped turn a bad 1930?s recession into a trade war and then a world wide depression.
The other consensus point is that the US Federal Reserve tightening credit was the other cause of turning a recession into depression. Luckily the world seems to have learned on that point. Thus we are seeing unprecedented amounts of money being thrown into the pot to keep credit flowing. It is too soon to see how that will work and if there is enough government money to restore free flowing credit but at least someone learned since the last time.
Where the activity will be is one question. Typically pharmaceuticals, tobacco, and financial services hold up better during a recession and therefore attract investment. These would be good areas for trading. However, financials are a mess so they will be much more volatile.
When will the recession end or when will it convert to a depression? The so called ?half way rule? says that you can expect other traders to discount a recovery in their trading halfway through a recession. At the current time, calling the end to this mess is a real problem. A contrarian view is that when the newspapers are announcing the end of the financial world it is the time to get optimistic and start taking long positions.
Boomers, Trading, Trading Volume, and Money in the Market
Prior to the global financial meltdown people were anticipating that baby boomers retiring with their wealth would pull money from the stock market and put it into more conservative investments such as CD?s. Now it appears that many of the boomers have lost half their wealth or more.
Will that keep more folks working? You can probably expect those folks who could not retire to invest in the market again in an attempt to leverage their earnings to facilitate their retirement plans. So, maybe there will be more traders?
Will you be trading and/or investing in US dollars or other currency? With the massive amounts of cash being injected into the economy world wide and the steadily increasing tax bill we can expect to see currency values decline in some countries and increase in others. It might be time to consider trading on the Australian or British markets for the duration of the recession.
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