{"id":166991,"date":"2020-03-20T13:13:33","date_gmt":"2020-03-20T17:13:33","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=166991"},"modified":"2020-03-20T09:31:35","modified_gmt":"2020-03-20T13:31:35","slug":"how-to-trade-a-credit-crunch","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2020\/03\/how-to-trade-a-credit-crunch\/","title":{"rendered":"How To Trade A Credit Crunch"},"content":{"rendered":"
March 20, 2020<\/div>
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By <\/strong>Orbex<\/strong><\/a><\/p>\n

As we mentioned in our last article,\u00a0we are in the midst of a credit crunch.<\/a><\/p>\n

Central banks are engaged in unprecedented actions<\/a>\u00a0in an effort to stave off a financial crisis which could lead the world into a recession.<\/p>\n

We already talked about\u00a0how to trade in a recession,<\/a>\u00a0but what about just ahead of the recession?<\/p>\n

After all, we don\u2019t know if the current situation will evolve into a major recession, or there will be a quick contraction and a relatively fast rebound.<\/p>\n

Extrapolating from Chinese data, some have argued that from the peak of cases (that is, when the spread of the coronavirus gets under control) there are about three to four weeks until the economy starts reactivating.<\/p>

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That has led some analysts to optimistically hope that maybe we\u2019ll be back to \u201cnormal\u201d before the end of the semester.<\/p>\n

Why is All the Money Gone?<\/strong><\/h2>\n

What\u2019s happening right now is somewhat unique, in the sense that there isn\u2019t anything inherently wrong with the financial markets.<\/p>\n

The risk to the economy is an external factor: the policies of the government to control the COVID-19 outbreak. This means we are a lot closer to a 2001 scenario (post 9-11) than a 2008 scenario.<\/p>\n

In any case, one of the traits of a credit crunch is that everyone needs cash. Right now most major businesses are drawing down on their pre-authorized loans from major banks. This is so that they have cash on hand during the period they are forced to shut down.<\/p>\n

Essentially, it is to replace their normal cash flow and to continue to pay suppliers and employees.<\/p>\n

The Failure of Safe Havens<\/strong><\/h2>\n

The extraordinary demand for liquidity is putting a huge strain on the financial industry, which generally functions by balancing relatively stable inflows and outflows.<\/p>\n

This is where central banks come in to supply them with the liquidity customers are demanding. If the economic shutdown is short-lived, then the companies will restart operations and pay back the money they\u2019ve borrowed.<\/p>\n

That\u2019s the best case scenario and offers the best opportunities for traders.<\/p>\n

But, we also have to be mindful of the risks, where the credit crunch turns into a crisis; then into a recession. After all, traders make money by balancing the risk-reward ratio in their favor.<\/p>\n

Volatility<\/strong><\/h2>\n

No one knows for certain where this is going to end. So, the markets get very jumpy. There can be massive swings even in forex \u2013 with GBPUSD dropping 5% in one day! That\u2019s 500 pips!<\/p>\n

Since the idea is to conserve liquidity to buy in on the bottom, when trading a credit crunch, you want to be especially mindful of your margins and risks.<\/p>\n

Yes, broader swings mean you can make more. But, you also want to be able to maximize your ability to seize an opportunity. Smaller, shorter trades help take advantage of market moves and generate some profit while keeping you from being locked in trades that might prevent you from taking a better position.<\/p>\n

Going into a Potential Recession, Cash (Liquidity) is King<\/strong><\/h2>\n

Credit crunches are often where more conservative traders excel. There is a lot of risk in the market. And more risky traders are being forced to liquidate because they are overextended.<\/p>\n

A composed trader with extra capital in their account can find some really good deals if they look carefully.<\/p>\n

By <\/strong>Orbex<\/strong><\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Orbex As we mentioned in our last article,\u00a0we are in the midst of a credit crunch. Central banks are engaged in unprecedented actions\u00a0in an effort to stave off a financial crisis which could lead the world into a recession. We already talked about\u00a0how to trade in a recession,\u00a0but what about just ahead of the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-166991","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/166991","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=166991"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/166991\/revisions"}],"predecessor-version":[{"id":166996,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/166991\/revisions\/166996"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=166991"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=166991"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=166991"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}