Before we dive further into the markets and strategies, let’s first understand the broad strokes of a recession and what it really means. 

The term “recession” is generally applied when two consecutive quarters of negative GDP growth are reported, dubbed a “technical recession.” However, this can often be myopic and not encapsulate the entire economic environment. Unemployment, consumer spending, and lending accessibility are just some of the other indicators that help convey when an actual recession has occurred. Overall, there should be a general decline in overall economic activity. 
 

In the US, the National Bureau of Economic Research (NBER) is the authority in determining a recession. They define it as: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” [1] Therefore despite the US reporting two negative quarters of growth in 2022, the Whitehouse issued a blog stating they are, in fact, not in a recession. [2] 

Regardless, when you see a general decline in economic activity, being prepared and able to adapt your strategy on the fly will largely determine your success as a trader when market conditions change. 

Most know that in recession-like conditions, people become more risk-averse. We’ve seen this all throughout 2022. Risk-on assets like crypto, high-growth tech stocks, and speculative assets plummet, and safe havens currencies and assets rise. 

In terms of forex, we’ll find that the demand for a currency will still largely be determined by the economic state of the issuing country/region. We’ll see strong economies and trusted currencies that the market believes can weather a recession rise or remain stable, and economies that are more susceptible to a severe fallout decline. 

Most traders will not trade every market, so the first thing to understand in a recession is how your asset class has historically acted in an economic downturn. We all know that past performance is not an indication of future performance, but as the saying goes, “history doesn’t repeat, but it often rhymes,” so let’s first look at how different asset classes have historically performed. 

Forex is not like other asset classes. Forex is to an economy as oil is to a car engine. It keeps the engine functioning but is not necessarily the gas that makes it go. Unlike an overall stock crash, in a recession we’ll see certain currencies shine. The main thing to look at is a country’s strength in a recession and how much it is seen as a “safe haven”. 

For example, in the first half of 2022, as recession fears were reaching a fever-pitch, we saw great strength in the USD. This is because most traders have greater trust in the US Dollar and confidence in the US economy, despite the US experiencing severe inflation and stagflation concerns. 

It’s important to note that these are broad generalisations. Each recession will have its own intricacies and market movements. At the end of the day, macroeconomic data is still king and will trump any broad-stroke generalisation. Indicators and future forecasts of metrics like balance of trade (imports/exports), currency demand, employment figures, inflation, spending behaviour, and monetary policy will all have significant effects on the strength of an economy and subsequently its currency. Remember to keep up to date will the latest news, forecasts, and figures. One way to do this is by visiting Fusion Markets’ economic calendar.  

For instance, we saw weeks before that energy prices were coming down due to a number of factors (Libya’s lifted embargo, OPEC+ meetings, lower demand, etc.) - energy was a major factor in the US’s rising CPI in 2022. This combined with the Fed’s less hawkish stance on rate hikes, positive job numbers, and slowing inflation saw markets rally and embrace a higher risk appetite, further exemplified by the fall of the DXY. 

Overall, we’ll generally see indices crash in a downturn. This year we saw the S&P500 fall below the 20% threshold that stock traders use to determine a “bear market”. Similarly, from 2007-2008, we saw the S&P 500 fall from 1,527 (Sept. 2007) to 968 (Sept. 2008) and the FTSE 100 drop from 6466 to 4902 over the same period.  

That being said, not all stocks will plummet. While “growth” stocks will be hit the hardest, you’ll notice that “defensive stocks” may actually rise during this time. For example, McDonald’s Stock rose 5.8% in Sept 2007 to Sept 2008. Similarly, we saw Coca-Cola increase revenues by 12% quarter on quarter in 2022 Q2. 

Fidelity created a template (below) that outlines a rough guide of how different sectors perform at different stages of the business cycle. 

Obviously, gold is seen as a safe haven to many, especially during a recession and historically has thrived in risk-off conditions. However, gold is not the only commodity that may see gains. Similar to stocks where staple companies rise, we often see other popular commodities used when times are tough such as corn and wheat also rise. Reversing this assessment, we’ll also find commodities in high demand in booming economic conditions like those used in infrastructure, such as copper, fall. 

Similar to stocks and forex, these are all broad strokes and real-time data will trump generalisations. Ask yourself questions about how commodity markets will be affected in an economic downturn such as: are there political hold-ups (sanctions, embargoes)? How will the supply chain look (what could reduce/increase supply)? Does the commodity have new uses/markets (e.g. EVs)? 

Crypto has not been around in a recession, so it can be difficult to determine how it will react in such conditions. However, it has been through several bear markets that can paint a telling picture of how the market behaves in a downturn. 

Obviously, crypto is in the basket of “risk-on” assets, so you’ll generally see falls across the board, even in deflationary crypto assets. The real question is, what kind of falls will you see? 

Historically, Bitcoin has been the gold standard and although it has dropped significantly in bear markets its crash has been less severe than altcoins (alternative coins) like Doge, Ada, and Stellar. Ethereum is also now considered a bluechip coin and may show the same resilience in an upcoming recession, but in the last bear market (2018 - 2020), it followed the same big crash blueprint of other altcoins, coming down from $1,396 USD to $84 at the bottom of the market. 

The other key factor you’ll need to consider is which altcoins have staying power. While it’s true Bitcoin will hold up better in a market downturn than altcoins, it is also true that Bitcoin will have less upside than altcoins that are able to survive through a bear market. In 2020-2021, altcoins that weathered the bear market (Ethereum included) saw mind-boggling rises that dwarfed the return of bitcoin. 

At the end of the day, it comes down to your risk appetite, your time horizons and your trading style. 

What kind of recession is this and what policies are central banks enacting to soften the blow? If we look throughout history, we’ll see a variety of different recessions with varying lengths, severities and outcomes. So, while it’s important to know how asset classes generally respond, it’s also very important to know what is unique about the recession you’re experiencing.  

Let’s examine two past recessions. 

The Covid-19 recession was unlike many recessions of the past due to the unique effects on supply chain, employment and the unprecedented QE response from central banks. While the markets had been on a significant bull run for some time, the downturn can only be described as abrupt and violent.  

Following, central banks went into action and put the jets on stimulus and other economic incentives to keep their economy afloat. As a result, we saw unprecedented growth across risk-on assets, and assets affected by supply chain issues such as corn and timber. 

Central banks’ response also saw further economic hardships appear as inflation rose significantly, further affecting economic stability and has led to what many are predicting as a long, hard crash in the next recession. 

The Great Financial Crisis (GFC) was a severe recession that affected economies across the globe. It was largely driven by financial deregulation in the US (repeal of Glass-Steagall) that allowed risky subprime lending and securitisation of toxic assets. As a result of the overheated mortgage-backed securities market, when the economy started to slow in 2007 it set off a chain of events that created chaos throughout the global markets, leading to global credit freezes.  

During this time the S&P500 fell 38.49% in 2008 (its worst year since 1937). In order to prevent a depression, governments began implementing quantitative easing (QE) policies, as well as a number of other measures to prevent further economic catastrophe. However, it still took roughly 4-5 years for the markets to fully recover. Similar to today, in the FX markets we saw USD act as a safe haven. 

Notable price market movements in 2008: 
 

• DJIA -33.84% 
• S&P500 -38.49% 
• Gold Rallied +8.29% 
• Oil plunged -53.5%  

While you will be adapting your strategy in a recession, it’s still important to stick to your trading plan. Know your take profit levels, know your stop loss levels and know your time horizon. 

Are you an intraday trader or a swing trader? Can your strategy in a bull market be applied in a bear market with tweaks? Has your risk appetite changed? 

Let’s examine a couple of common CFD trading strategies: 

Hedging is the trading strategy of mitigating your risk by taking an opposite position in the asset or related asset. As many people are often long-term stock investors, some traders may wish to offset their risk by taking an opposite position in stocks or indices. If you’re looking for a cost-effective way to implement this strategy you can use Fusion Market’s commission-free US Share CFD or Equity Indices trading. 

As you will know the market you’re trading (FX, Equities, Commodities, Crypto etc.), you’ll also have some rough ideas of where particular assets may move. Position trading is akin to buy and hold or sell and hold strategies. In that, you take a position and run with it until you hit your broader take profit or stop loss levels. 

Scalping is the practice of buying and selling an asset quickly with the aim of making small and quick profits. It is often favoured by day traders. There are many scalping techniques with some even considering arbitrage as a form of scalping. Others may try to briefly catch a trend, while some traders may look to trade the asset when it is “ranging” (bouncing between clear support and resistance levels).  

Carry trading is profiting from interest rate spreads between two currencies by borrowing in a currency with a low-interest rate and converting that to a currency with a higher interest rate. This is a popular strategy among forex traders. However, this strategy carries risks such as the currency pair you are carry trading substantially drops in value. This is why it’s important to know the latest macroeconomic data to ensure your loaned asset doesn’t break in the wrong direction.   

This can be especially potent in an economic downturn as traders will be closely watching central banks and will react quickly to their decisions. For example, as inflation and recession fears were major concerns in 2022, central bank interest rate hikes had significant effects on the markets and the perceived economic outlook of a country. This type of trading can be both short or long-term, but to be successful you’ll need to know what the market already thinks. A common method for this is to look at futures data and other markets to gauge expectations. For example, you can see data on Fed fund rate futures to see what interest rate hikes the market expects from the Fed. How closely the Fed matches expectations will affect how the market moves on and after their announcement. 

These strategies, much like other information in this article are broad ideas, nothing is to be taken as gospel. Still, it is a useful way to get a better grasp of what happens in a recession and how to position yourself to remain profitable when the market falls. 

Let us know what you think and if you have any other things you believe we should have added. 

To be able to trade all your assets in one place with the lowest commissions forex broker, join Fusion Markets today and get access to over 250+ trading assets. With 37ms* executions and from 0.0 spreads, we’ve made trading easy. 

Read Time: 10 - 15 Minutes

In this article, we go through everything you need to know about forex copy trading and how you can gauge the benefits and drawbacks it offers to both beginners and experienced traders.

What is Copy Trading?

Copy trading is software that is used to duplicate the trading strategies of selected traders.  

 
While this may sound like “mirror trading” (a technique used to mimic another trader’s strategies), the key difference is in copy trading the copying trader has their account linked to the account of the trader being copied. This means that whenever the trader being copied opens, closes, or alters a position these actions are also applied to the linked account (the copying trader).  

Before we dive into more details about copy trading, it’s important to distinguish between copy trading and social trading, as they are often mistakenly considered to be one and the same. Since we have already made clear what copy trading is about, let’s go into what social trading is, and how it might differ from copy trading. 

In essence, social trading is a combination of social media and investment. In social trading platforms, you can directly communicate with other investors, and exchange information about what trades to perform in a given time. This allows more people to collaborate. 

The main advantage of this is that you can analyse the trades yourself, meaning in some cases, you can try to see if there are any errors in making the trades before you execute them yourself. 

In mirror and copy trading, traders are in most cases using automated software to mimic the strategies of selected traders. 

In both mirror trading and social trading, you are not directly following someone’s trades, but are instead either automating their strategy (mirror trading) or manually following their strategy (social trading). 

In contrast, copy trading follows the trades of the selected trader, including when a position is opened and closed, as the accounts are linked. 

While social trading involves a closer look at trades and is great for people who want to learn trading by experiencing it first-hand, it also includes investing more time in research on the terminology and strategies of the industry.  

It should also be noted that with social trading, you might still be solely responsible for the trades that you perform. You only gain information from other traders within the social trading platform, and you can't automatically execute the trades based on other traders, as copy trading platforms allow you to do. 

In a sense, the main difference is in the way people approach trading in the first place.  

For those who are keen on learning everything about trading, social trading is a fantastic place to start. They gain knowledge along the way as they perform trades themselves. They copy other traders but also do their own research in the process, because they want to know the reasoning behind those trades.  

Copy trading, on the other hand, is for people who want a hands-off approach to trading, who prefer not to have to constantly monitor their trades. It’s for people who would rather just trust their trades to an experienced trader or someone they know personally.  

Why Should I Learn About Copy Trading?

These days, when markets are monitored around the clock, a variety of strategies are called for and across various asset classes.  

Investors might favour some strategies they have applied for a long time and with good results, but there’s no guarantee that those strategies will always work in the future. 

History of Copy Trading

While popular now, the first iteration of copy trading goes back to 2005, when researchers found a way to create an algorithm that could replicate trading behaviours.  

This use of algorithms quickly grew in popularity as investors and brokers picked up on it. This became the birth of mirror trading. 
 

However, it wasn’t long until brokerages and popular traders used the popularity of mirror trading to instead allow investors to link to their account, and for a small fee, allow investors to get complete exposure to their positions and strategies. 

Copy trading has turned out to be a unique way of getting access to the financial markets. The innovation spread to others who wanted to invest in foreign exchange, crypto or stocks but didn't have the time to follow markets, analyse information, or devise strategies they weren’t even sure would work.  

What Are the Benefits of Copy Trading? 

Copy trading has several benefits. These fall under two main categories: Income and Learning.  

You Earn Passive Income

Copy trade forex allows for passive income. You only need to set up your account, find a reputable investor that has hopefully been investing or trading for many years and has a reliable track record with few bumps along the road in their performance. Ideally, they take less risk than the average investor by holding fewer drawdowns and accessing markets you wouldn’t either get exposure to (e.g., Forex, Commodities etc.).  

In a way, to copy trade forex is to ride the wave that the experienced investor is creating and profit from it. 

Of course, investing in this way is not entirely risk-free. That is what makes the other benefit category, learning, more significant if you’re a beginner trader. 

You Learn from the Experts

One crucial benefit of copy trading, which beginners should be aware of, is that it can save them tons of time learning the fundamentals of forex trading.  

Learning how to analyse market information and plan a strategy from scratch can take a long time. Copy trading helps shorten that learning process by following the market in real time with actual skin in the game.  

You can experience how seasoned traders approach trading and pick up ideas from them. Eventually, you may even make your own variations of their strategies.  

You Learn How Experts Handle Losses

That doesn’t mean you should blindly trust what an established investor is doing with their trades. Even experts make mistakes.  

In fact, good investors study their past losses to identify errors in their approach and make adjustments, intending to minimise future risk further. 

Among the things you can also learn from copy trading, then, is how to recognise these mistakes for yourself, despite an expert’s opinion or because of an expert’s mistake, when a trade will result in a loss. 

And from the expert traders’ example, you learn how to learn from your mistakes. 

What Are the Drawbacks of Copy Trading?

Like all other investment strategies, copy trading has its fair share of disadvantages across any platform.  

Even Experts Make Mistakes

As mentioned before, even professional investors can make mistakes. They might trade something they wouldn’t normally trade, or refuse to close a trade when they should have. These are common mistakes we can all make due to our hidden biases. It's best, therefore, to partially monitor your investments as well, and not passively hope for the best. Ideally, you’re following along and can understand the reasoning for why the trader you’ve followed has done what they’ve done.  

Investing Involves Costs 

For people keen on investing in high volume, the commission fee that professional investors take can sometimes add up if money has already been lost through a bad or missed strategy.  

With a copy trading platform like Fusion’s, you only pay fees for any positive performance. There are no hidden management fees or entry or exit fees. You simply agree to the performance fee when signing up and away you go.  

Dealing with Drawbacks

Like everything else, copy trading has its pros and cons. With careful decision-making, proper research, and intelligent risk management, you can maximise the benefits of copy trading and minimise its drawbacks.                                      

Final Thoughts 

There isn’t much difficulty to copy trading. All you're doing is finding someone you know with a decent track record which has steady gains with minimised risk and hopefully mimicking their strategies for trading in the markets.  

That can be done by looking at investors’ trade history and analysing their trade entry (both buy order for long positions and sell order for short positions). At least two years of history is a good place to start.  

Overall, copy trading can minimise the risk of capital loss if you have found the right trader. For professional investors already familiar with various strategies, copy trading is still a good option - it might get you access to an uncorrelated asset class they might not have traded before or sharpen their own skills by following and learning from someone else.  

If you’d like to get started with copy trading, Fusion offers a range of options for both beginner and seasoned traders. Fusion+ allows traders to copy trade some of the most successful traders in the financial markets.  
 

We also offer a copy trading service through our partner DupliTrade. For those who wanted more of a social trading experience we also provide that with our partner, Myfxbook Auto Trade. 

If you’d like to learn more, contact us and we’ll happily answer any questions you have about copy trading, Forex or CFDs.  

FAQs

What’s the main benefit of copy trading? 

The main benefit of copy trading is to automate the investors' trading and minimize risk. It can also prevent slippage in buy and sell orders because most copy trading platforms are fast and automated. 

How does copy trading work? 

It works by copying the strategies of other experienced investors and applying them to your portfolio. 

Can I use MT5 and MT4 for forex trading? 

You can use MT5 and MT4 for forex trading. While MT4 is explicitly designed for forex investments, MT5 has a range of other assets, both centralized and decentralized. 

What are the risks of copy trading? 

The main risk of copy trading is that even experienced traders whose strategies you might copy can make mistakes. You have to monitor your own investments to spot issues at once if something goes wrong. 

Thousands of brokers are ready to help you invest. Experience copy trading with MT4 or MT5. Sign up now!