How to trade during a recession

Explore other assets to watch during a recession

• Safe haven currencies – weaker currencies tend to be more vulnerable to extreme volatility in recessions. More stable currencies like the US dollar, British pound, Japanese yen and Swiss franc tend to weather the storm better, meaning that there’s substantial potential profit to be made in FX during recessions
• Commodities – uncertain, bearish markets often drive a demand for tangible commodities, so many traders will go long on them during a recession. Other commodities fare worse traditionally in recessions and so some traders will go short on those
• Gold and other precious metals – of all the safe haven commodities, gold is the most famous. The gold price historically spikes whenever there’s a recession. So do other precious metals, such as palladium, platinum and silver. It’s also often used as a hedge against inflation
• Indices – an index will track the performance of a collection of shares or even an entire sector. This means you can gain exposure to many companies at once at diversify for less risk, rather than putting all your eggs in one basket
• Options – with options, you get the right – but not the obligation – to buy or sell during a certain time period at a certain price. This’ll enable you to simply let the option expire if markets become too unpredictable
• Futures – trading futures means you can lock in favourable prices and keep positions open for long periods of time (for example, until the market changes) without incurring overnight charges
• Government bonds – many investors and traders flock to the perceived safety of bonds, and government bonds in particular are seen to be low risk, driving their price up

Decide whether to trade or invest*

You can trade the increased market volatility caused by recessions by creating a trading account and taking a position with CFDs. These are financial derivatives, which enable you to predict rising and falling markets by going long or short.

CFDs are leveraged products. This means you open a position with a deposit, called margin, which is just a fraction of the total poisition size. Please note that this means you may gain or lose money faster than you'd expect.

If you’d rather invest in the companies directly, you would need a share dealing account, something IG International doesn´t currently offer. This would make you a shareholder, and you would make a profit if the share price increased and you sold them for above the price for which you bought them. You would also get other shareholder privileges, like dividends and voting rights.

Learn more about trading vs investing

*With us you can only trade derivatives via CFDs.

Trading during a recession

When you trade with us, you’re using CFDs. These enable you to take a position on your chosen market’s price movements, without owning the underlying asset outright. This means that you can trade both rising and falling markets – useful in a recession, when many asset classes’ prices drop.

So, if you believe a market is set to lose value, you can take short positions on stocks, indices, forex, commodities, interest rates and more. You’d then make a profit from a decline in your traded markets’ price. However, if the price moves up, against your prediction, you’d incur a loss.

To take a position by trading CFDs, follow these steps:

1. Research your preferred market
2. Create a live account or practise on a demo
3. Select ‘buy’ if you think the price will rise, or ‘sell’ if you think it’ll fall
4. Take steps to manage your risk
5. Open and monitor your trade

CFDs are a leveraged form of trading, meaning that you’ll pay an initial upfront deposit (called margin) to open a larger position. While this can make your capital go further, leverage also means that both profits and losses are calculated on the full trade amount and not your margin cost and could substantially outweigh this deposit amount.

Find out how to hedge existing positions during in a recession

Hedging is a strategy you can use to reduce your risk of potential loss by having two opposing positions open, in order to make the most of the market no matter which way it turns.

For example, if you own an asset like shares in a company that you think will depreciate in value during the recession, you could short the same stock. If you’re right, the profits from your short position would offset a proportion of your share position losses.