Many traders wonder if they should trade during times of global conflicts and market instability, and this is true. When the economy is unstable, or when geopolitical risks grow, markets may become an unpredictable environment with many unknowns. However, it is not all doom and gloom, and more experienced traders can spot emerging opportunities even in fragile markets. This guide provides some advice on how to make the most of your trading activity in times of global conflict and global instability.
Trading details in times of global conflict and instability: Markets move in cycles. Every decade or two, we have some kind of crisis event. These can range from geopolitical tension, local conflicts, global instability, financial crises, etc. Most of the time, the effects of these events spread throughout the global economy. They affect trade, devalue currencies, cause supply disruptions, increase inflation, and more.
The scale of these events varies. Its general effect can last anywhere from a few days to several years.
The markets are usually the first to react to it. However, most of the time, the immediate market reaction is chaos. News is flying left and right, some are exaggerating events, causing more tension. When the dust settles, what determines the state of the market is how market participants interpret the current situation and the potential impact of the specific event on their portfolio or the entire market. The first thing most traders do is hedge their portfolios. Others try to find and take advantage of emerging opportunities in a declining market. However, despite the various options for playing the market, trading in times of global conflicts and instability is a difficult process. Many traders struggle to deal with it. The process becomes more difficult for those who trade using leverage.
Events affecting economic stability
Many traders mistakenly believe that financial markets are only affected by fundamental events. Such events may include a country or company defaulting on its debt, an interest rate announcement by the Federal Reserve or European Central Bank, or more. However, the truth is that financial markets can be affected even by events that initially seem unrelated.
The same applies to the scale of events. It doesn’t take a war or a global financial collapse to destabilize markets. Often, even small-scale events can have large consequences. Traders must consider the nature and size of the event when considering how to play the markets. Here are some common destabilizing market conditions and how they have affected financial markets in the past.
Global conflicts: terrorism, armed conflicts, civil unrest, international economic and political sanctions, embargoes – these and many other factors directly or indirectly affect financial markets and investor behavior.
For example, wars have led to the largest declines in global markets in the past. When Germany attacked Czechoslovakia in 1939 and France in 1940, the S&P 500 fell 20.5% and 25.8%, respectively. The day after the Pearl Harbor attack, the index fell by 11%. During the 1973 oil crisis, the S&P 500 fell more than 17%.
These periods are accompanied by numerous corporate defaults, booming volatility, and a general feeling of insecurity that grips the market. However, it’s not all doom and gloom. While for non-experts, these statistics will quickly lead to the conclusion that everyone should sell to protect their capital when the world is in turmoil, this is not always the case.
Hedging and trading strategies in light of economic challenges
Inflation works stealthily and usually does not directly or immediately affect capital, or at least that is what many think. However, it is one of the most devastating events for financial health. Inflation can be fueled by many stimuli, including supply/demand instability, labor market disruptions, economic slowdown, monetary policy developments, etc. Inflation rates may vary, but the higher and longer they last, the more devastating its impact.
To protect their portfolios from periods of high inflation, traders typically choose assets designed to hedge against loss of purchasing power. Instead, instruments with a high probability of generating additional income and increasing value in the face of rising prices. Many assets have historically performed well in periods of high inflation, most of them commodities. Inflation is often referred to as the “wallet killer.” This is why trading during periods of high inflation requires mastering and understanding which asset classes perform best when purchasing power suffers – especially when it happens globally and when there is nowhere to hide.
The impact of this event rippled across different sectors, causing disruptions throughout the market. Some companies needed months to bring their supply chains up to speed. Or we could deal with the 9/11 terrorist attacks, which led to a sharp decline in the stock market and wiped out more than $1.4 trillion in value from US markets. The following week, the Dow Jones Industrial Average lost 14%, while the S&P 500 and Nasdaq lost 11.6% and 16%, respectively.
Given the increasing interconnectedness of global markets, investors and traders should be aware of the increasing importance of black swan events and their potential impacts on portfolios. The bottom line is that even if a particular factor does not initially indicate any relevance to your deals
Tips on trading in times of global conflict and instability
Periods of market uncertainty can evoke a wide range of emotions in a trader. Some may fear losing their capital. Experienced traders are likely to feel calm and relaxed. Active traders may be excited about opportunities arising from increased volatility. There is also a group of traders who suffer from the fear of missing out while observing how others profit in a bear market. No matter which group a trader falls into, one thing is clear – trading during turbulent times is more challenging than trading when overall market sentiment is positive. . Here are some tips on making the most of trading during market instability and protecting your capital.
Hedging or Exiting the Market: Which Beginners Might Choose: Beginner traders panic and make hasty moves when the market declines because they are less likely to experience similar crises. When things go wrong, it’s essential to stay calm and let your risk controls over investing,
During down market periods, traders can usually take two approaches – a passive or an active approach:
The passive approach is to close positions and head for the exit. Stopping trading activity for a period of time can be beneficial in many aspects. First, it protects capital by making profits. Next, it is a lifesaver for traders who do not feel comfortable when chaos starts to take over the markets. Having to interpret signals from technical indicators, coupled with rising market pressure, can be a difficult task. Taking a break may be the best step you can take in such moments. Third, it leaves room to plan the next move or allocate a potential portfolio replacement. Once things calm down and you have a plan, you can return. The active approach is to hedge your portfolio by investing in assets better suited to the new market reality.
