Was the Yield Curve Inversion Wrong in Predicting a U.S. Recession?

Economic

Summary:

It's important to recognize that while the indicator has an impressive track record, no single economic metric is infallible.

The spread between the 3-month U.S. Treasury bill yield and the 10-year U.S. Treasury yield, commonly referred to as the yield curve spread, is a vital indicator in financial markets and is closely monitored by investors and the Federal Reserve, particularly given the historical efficacy of its inversion predicting U.S. recessions. An inversion signals that markets believe current policy may be too restrictive, potentially triggering an economic slowdown. Indeed, since 1960, the spread between the 3-month and 10-year Treasury yield has inverted before every U.S. recession, making it one of the most reliable indicators of economic downturns. There has only been one instance where this spread inverted and a recession did not follow, or “false positive”—in 1966. With so few false positives, investors are still cautious around the general rosy economic outlook for 2025 following the prolonged inversion over the last couple of years.

The Federal Reserve’s aggressive rate hikes to combat inflation pushed short term yields higher and caused the curve to first invert in October 2022, and the curve remained inverted until December 2024. However, while this has been the longest inversion in recent history, a recession has yet to materialize. That said, the recent steepening and un-inverting in the curve provide key reasons as to why the inversion may not signal a recession:

Stronger-than-expected economic data such as robust labor markets, consumer spending, business investment and industrial production indicate the economy is likely to remain on solid footing.

The economy has shown it can withstand higher policy rates and estimates of r-star or neutral rate in the economy have been rising suggesting markets may have been mispricing long-term rates too low.

The spread between the 3-month and 10-year Treasury yields remains a critical economic indicator. Its current positive slope suggests optimism about a soft landing—where inflation continues to moderate without a severe economic downturn. However, it’s important to recognize that while the indicator has an impressive track record, no single economic metric is infallible. However, time will tell; the last four cycles saw the curve un-invert on average six months prior to a recession. This is why investors should consider yield curve inversions alongside other economic indicators to gauge the likelihood of a recession.

It's important to recognize that while the indicator has an impressive track record, no single economic metric is infallible.

The spread between the 3-month U.S. Treasury bill yield and the 10-year U.S. Treasury yield, commonly referred to as the yield curve spread, is a vital indicator in financial markets and is closely monitored by investors and the Federal Reserve, particularly given the historical efficacy of its inversion predicting U.S. recessions. An inversion signals that markets believe current policy may be too restrictive, potentially triggering an economic slowdown. Indeed, since 1960, the spread between the 3-month and 10-year Treasury yield has inverted before every U.S. recession, making it one of the most reliable indicators of economic downturns. There has only been one instance where this spread inverted and a recession did not follow, or “false positive”—in 1966. With so few false positives, investors are still cautious around the general rosy economic outlook for 2025 following the prolonged inversion over the last couple of years.

While the Fed typically cuts rates in response to weakening economic conditions, the Fed is already well underway in its cutting cycle while growth has remained resilient reducing restriction on the economy. Stronger-than-expected economic data such as robust labor markets, consumer spending, business investment and industrial production indicate the economy is likely to remain on solid footing.The economy has shown it can withstand higher policy rates and estimates of r-star or neutral rate in the economy have been rising suggesting markets may have been mispricing long-term rates too low.

U.S. yield curve steepness

Was the Yield Curve Inversion Wrong in Predicting a U.S. Recession?_1

FactSet, Federal Reserve, J.P. Morgan Asset Management. In December 2024, the yield curve un-inverted after being inverted for 25 consecutive months.

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JPMorgan

Economic

Recession fears have eased, with 69% of small and 71% of midsize businesses either uncertain about or not expecting one in 2025. However, inflation remains a top concern as most small business owners are seeing an increase in business expenses, and more than three-quarters of midsize business leaders feel costs are rising.

“Businesses are entering 2025 with positive momentum after navigating a period of elevated inflation and interest rates better than expected,” said Ginger Chambless, Head of Research, JPMorganChase Commercial Banking. “We’ll be watching closely to see how this optimism extends throughout the year and influences companies’ growth strategies.”

Embracing opportunities amid a complex global landscape

Today, the majority of leaders say they are feeling positive about the local economy—60% of small and 59% of midsize businesses express confidence—but the global outlook is more tempered, reflecting uncertainty around shifts in global trading patterns, potential tariff impacts and geopolitical tensions.

When identifying challenges for 2025, midsize businesses point to international tariffs (19%), U.S. competition (18%) and concerns about China’s trade policies (17%, up 8 percentage points from last year). Still, nearly half (46%) plan to expand into new geographies in the next 12 months as they seek growth.

“Throughout history, business leaders have shown a remarkable ability to turn obstacles into opportunities,” said John Simmons, Head of Commercial Banking, JPMorganChase. “As they navigate labor pressures, supply chain dynamics and myriad other challenges, their tenacity and ingenuity will undoubtedly propel their growth in the coming year.”

Forty percent of small businesses and close to half of midsize businesses (46%) say labor shortages, retention and recruiting are significant challenges. Many are considering tactics like increasing wages, offering flexible hours or increasing benefits to address these issues.

Revenue and profit expectations jump as companies focus on growth drivers

“Small business owners tend to be upbeat by nature, but as the survey shows, we’re seeing particularly strong levels of optimism as we start 2025. I look forward to seeing how that enthusiasm plays out in the economy,” said Ben Walter, CEO of Chase for Business.

Buoyed by rising optimism, businesses are bullish when it comes to their companies’ performance projections for 2025. Among small business respondents:

Two-thirds predict higher profits (67%) and sales (66%)

Half (51%) plan to increase spending

The majority (64%) plan to invest more to support sales by adding products (35%), funding more advertising (34%) and increasing social media campaigns (31%), among other strategies

Small businesses are also investing in technology to fuel digital transformation. Notably, 48% plan to add artificial intelligence (AI) applications to their business in the coming year. While nearly 80% of small business leaders say they are either implementing, already using or considering adopting AI, about half (46%) express concern about its potential impact on business.

Midsize businesses are similarly looking forward to stronger results in 2025:

Nearly three-in-four (74%) expect revenues/sales to increase, up 13 percentage points from a year ago

65% anticipate higher profits, up 10 percentage pointsHalf (51%) plan to add headcount, up seven percentage points

38% are forecasting higher capital expenditures

To help drive this growth, slightly more than half of midsize businesses (53%) plan to launch new products and services, and 43% expect to engage in strategic partnerships and/or investments.

Positioning for sustainable growth

As companies build out their plans for the year ahead, factoring in the considerations below can help ensure they’re on track for sustainable growth.

Press on with market expansion:

Conducting regular market research to understand the competitive landscape and potential barriers to entry can help identify opportunities for growth in new markets or segments.

Unlock working capital:

Businesses’ working capital will need to keep up with expansion plans to accelerate growth. Strategies to unlock liquidity include increasing profit margins, improving inventory management and securing working capital financing.

Embrace digital transformation:

Investing in the right technology can help businesses stay competitive, streamline operations and enhance the customer experience. For example, process automation, increasingly implemented using AI, can be used for repetitive tasks such as data entry, invoicing and customer service inquiries, and reducing operational costs.

Derisk the business:

Developing a robust risk management strategy will help identify and mitigate potential threats and ensure business resiliency. For example, update cybersecurity protocols to protect data and diversify suppliers to handle potential disruptions.

Plan ahead for business transitions:

No matter what stage a business is in, create a transition strategy for multiple scenarios – whether it involves a merger, acquisition, IPO, employee stock ownership plan or another solution – to help bridge the gap between business success and personal wealth goals.

For more information on the 2025 Business Leaders Outlook survey, view the midsize and small business reports.

Survey Methodology

JPMorganChase’s Business Leaders Outlook survey was conducted online from November 11-15, 2024 for small businesses (annual revenues between $100,000 and $20 million) and from November 12 – December 4, 2024 for midsize businesses (annual revenues between $20 million and $500 million). In total, 2,644 U.S. business owners and leaders across various industries participated in the survey. For year-over-year trends, current data is compared to data collected in the fourth quarter of previous years. The results of this online survey are within statistical parameters for validity, and the error rate is plus or minus 3.1% for the small business findings and plus or minus 3.4% for the midsize business findings, both at the 95% confidence level.

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Daily News

Economic

[Quick Facts]

1. The U.S. announces new sanctions on Russia's energy sector.

2. Yoon Suk-yeol will not attend first impeachment trial hearing.

3. Fed's Goolsbee says jobs data shows labor market stabilizing.

4. Canada adds the most jobs in two years in December.

5. U.S. labor market remains robust, paving way for slower rate cuts.

[News Details]

The U.S. announces new sanctions on Russia's energy sector

The Russian Foreign Ministry issued a statement in response to the new sanctions imposed by the U.S. against Russia's energy sector, according to Russia's Sputnik News on January 11. The statement accused the U.S. of destabilizing global markets to harm the Russian economy at the expense of European allies and U.S. citizens. It also declared that Russia will respond to these hostile actions and consider them in its foreign economic strategy. The U.S. sanctions, announced on January 10, target major oil and gas producers, oilfield service providers, energy officials, and projects for the export of Russian energy products.

Yoon Suk-yeol will not attend first impeachment trial hearing

South Korea's impeached president, Yoon Suk Yeol, will not attend the first hearing of the trial to determine whether he will be removed from office or reinstated, due to concerns about his safety, Yoon Kab-keun, the lawyer representing the president said on January 12. Yoon Kab-keun explained that illegal attempts to enforce an arrest warrant have created security risks. If these issues are resolved, the president is willing to attend future hearings. The Constitutional Court plans to hold additional hearings on January 16, 21, 23, and February 4.

Fed's Goolsbee says jobs data shows labor market stabilizing

The latest non-farm payroll report suggests the labor market is stabilizing at full employment without signs of overheating, said Austan Goolsbee, President of the Chicago Federal Reserve, last Friday. Inflation has improved in recent months, but the annualized inflation growth appears high mainly due to rising price pressures at the beginning of 2024. If stability continues, with inflation rates remaining steady and employment staying stable and full, interest rates will return to a neutral level and are likely to be much lower than they are now in 12 to 18 months. However, the pace of rate cuts will depend on economic conditions.

Canada adds the most jobs in two years in December

In December 2024, Canada recorded its largest job growth in two years, with employment rising by 91,000 jobs and the unemployment rate falling to 6.7%. Economists surveyed had previously expected employment to increase modestly by 25,000, with the unemployment rate rising to 6.9%.

The employment growth in December stands in stark contrast to most of last year when hiring failed to keep pace with population growth and the unemployment rate surged. Canada recorded employment growth in 9 of the past 12 months, with an average monthly increase of about 47,000 jobs. The weakness in the labor market led the central bank to cut interest rates by 0.5 percentage points twice at the end of last year. Overnight Index Swap trading now indicates a roughly 60% probability of a 25-basis-point rate cut by the Bank of Canada later this month, down from 75% before the data release.

U.S. labor market remains robust, paving way for slower rate cuts

U.S. non-farm payroll employment increased by 256,000 in December, significantly exceeding market expectations, while the unemployment rate declined. The labor force participation rate remained unchanged from the previous value, and the month-over-month growth in wages slowed.

Breaking down the data, education and healthcare services, leisure and hospitality, and government sectors were the primary drivers of non-farm payroll growth. Additionally, retail employment turned positive from negative, likely boosted by strong consumer shopping demand during the year-end holiday season, while employment in transportation and warehousing also increased.

After being impacted by hurricanes in October 2024, the U.S. labor market saw a sustained recovery in November and December. The 256,000 job growth in December was the highest level since April 2024, and the unemployment rate also dropped from the year-high of 4.23% to 4.09%. This recovery can be attributed to strong year-end consumer demand driving above-seasonal retail job growth.

Another factor may be the noticeable rise in flu cases in the U.S., which kept job creation in education and healthcare services at elevated levels. Against a backdrop of an unchanged labor force participation rate, stable average working hours, and a marginal slowdown in average hourly wage growth, wage-driven inflationary pressures have eased.

With significant uncertainty surrounding inflation due to pending policies from Trump's administration, the Federal Reserve adopted a cautious stance during its December meeting, planning to slow the pace of rate cuts. The strong non-farm payroll data reinforces the Fed's rationale for a slower pace of rate reductions as it awaits more clarity on Trump's forthcoming policies.

[Today's Focus]

None

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Glendon

Economic

In the world of forex trading, speed, stability, and reliability are crucial factors that can determine the success or failure of a trade. Traders often use a variety of tools to enhance their performance, and one such tool that has become increasingly popular is the Virtual Private Server (VPS). A VPS can provide traders with the necessary resources to execute trades efficiently, reduce lag, and avoid technical disruptions, even when trading in volatile markets.

This article will explain what a VPS is, how it works, and why it is an essential tool for serious forex traders. We'll also explore how to set up and optimize a VPS for your trading needs.

What is a VPS?

A Virtual Private Server (VPS) is a virtual machine that runs its own copy of an operating system and acts like a dedicated server. It exists within a physical server, but it functions independently, providing you with a portion of the server’s resources, such as CPU, RAM, and storage space. In simple terms, a VPS gives you a private, isolated environment in which you can host applications, websites, or even forex trading platforms.

For forex traders, a VPS is invaluable because it offers several advantages over traditional desktop trading, particularly when it comes to uptime, speed, and reliability.

Why Use a VPS for Forex Trading?

There are several compelling reasons why forex traders, especially those who engage in automated trading or use Expert Advisors (EAs), prefer to use a VPS. Here are the top benefits:

Reduced Latency and Faster Execution

One of the most important factors in forex trading is speed. Markets can move quickly, and any delay in executing orders can mean missing out on profits or encountering losses. A VPS can reduce latency (the delay between the time an order is placed and executed) significantly. Since VPS servers are typically located closer to your broker's server, this reduces the time it takes for orders to travel back and forth, leading to faster order execution.

24/7 Uptime

Forex markets are open 24 hours a day, five days a week, and they can be highly volatile during this period. Traders often need to leave their trades running overnight or while they're away. A VPS ensures that your trading platform remains online and functional at all times, even if your own computer is turned off. This means your trades can continue running, and your Expert Advisors (EAs) can operate without interruption.

Enhanced Stability

Unlike a personal computer that may experience power outages, crashes, or internet disconnections, a VPS provides a stable and reliable environment. The server hosting your VPS is typically equipped with redundant power supplies, cooling systems, and reliable internet connections, ensuring minimal downtime.

Remote Access

Using a VPS allows traders to access their trading environment remotely, regardless of where they are located. This is ideal for traders who travel frequently or those who want to trade while at work, home, or on the go. As long as you have internet access, you can monitor your trades and make adjustments as needed.

Run Multiple Instances of Trading Platforms

A VPS offers more flexibility when it comes to running trading platforms. For example, you can run several instances of MetaTrader 4 (MT4) or MetaTrader 5 (MT5) simultaneously on a VPS, allowing you to manage multiple accounts or strategies at the same time. This is especially useful for professional traders or those with a diversified portfolio of currency pairs.

Enhanced Security

VPS hosting providers often offer robust security measures, including firewalls, malware protection, and frequent backups. These protections reduce the risk of your trading data being compromised or lost, which can be a major concern when trading on your personal computer.

How to Set Up a VPS for Forex Trading

Setting up a VPS for forex trading is relatively simple, but it requires careful attention to detail. Here's a step-by-step guide to help you get started:

Step 1: Choose a VPS Provider

The first step is to choose a reputable VPS provider that specializes in forex trading. Many brokers offer VPS services to their clients, often at a discounted rate or for free, if you meet certain trading volume requirements. When selecting a VPS provider, consider factors such as:

Server Location: Choose a provider with servers located near your broker’s data center to reduce latency and ensure faster order execution.

Uptime Guarantee: Look for a provider that offers an uptime guarantee of at least 99.9%. This ensures that your VPS will remain online with minimal disruptions.

Customer Support: Make sure the provider offers reliable customer support, especially if you encounter any technical issues.

Pricing: Prices can vary, but the VPS should offer enough resources (CPU, RAM, and storage) to run your trading platforms without lag.

Step 2: Set Up the VPS

Once you've selected a VPS provider, the next step is setting up your VPS. Most VPS providers offer easy-to-follow installation guides, but here's a basic outline of the setup process:

Access the VPS: After purchasing the VPS, you’ll receive credentials (IP address, username, and password) to log into your virtual server. You can access it via Remote Desktop Protocol (RDP) if you're using Windows or through SSH for Linux-based servers.

Install the Trading Platform: Once you’ve logged into the VPS, you can install the trading platform of your choice, such as MetaTrader 4 or 5. Most trading platforms have a straightforward installation process, similar to installing them on your local computer.

Configure Expert Advisors (EAs): If you plan to use automated trading strategies, you can upload and configure your Expert Advisors (EAs) to run on the VPS. This allows your EAs to operate without interruptions or downtime, maximizing their effectiveness.

Test the Setup: Before going live, it’s important to test the VPS setup. Monitor the performance of your platform and EAs to ensure everything is running smoothly and that there are no delays or issues.

Step 3: Connect to the VPS

After everything is set up, you can connect to your VPS remotely from any device with internet access. Simply use RDP for Windows or a remote desktop client for other devices to access your trading environment.

Optimizing Your VPS for Forex Trading

While a VPS can significantly improve your trading efficiency, it’s important to optimize it for forex trading:

Regular Updates: Keep your trading platforms and operating system up to date to avoid security vulnerabilities and ensure that your VPS is running smoothly.

Monitor Performance: Keep an eye on the resource usage (CPU, RAM, etc.) to ensure that your VPS can handle your trading activities. Upgrade your VPS if necessary.

Use a Dedicated VPS for Forex: Avoid running other programs on your trading VPS to ensure that all of its resources are dedicated to your trading platform, reducing the risk of slowdowns.

Conclusion

Using a VPS for forex trading can provide significant advantages in terms of speed, reliability, and stability. It allows traders to automate their strategies, keep their trading platforms running 24/7, and access their accounts remotely. For serious traders, especially those who use Expert Advisors (EAs), a VPS is an invaluable tool for improving performance and ensuring a smoother trading experience.

By carefully selecting a VPS provider, setting it up correctly, and optimizing your environment for trading, you can unlock the full potential of your forex trading strategies and stay ahead of the competition. Whether you’re a beginner or a seasoned pro, a VPS can help take your trading to the next level.

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

The forex market, one of the largest and most liquid financial markets in the world, offers significant profit opportunities. However, with the vast number of brokers operating globally, traders need to exercise caution when choosing a broker. Unfortunately, not all forex brokers are trustworthy, and some may even operate with fraudulent intent. Selecting a legitimate forex broker is crucial to safeguarding your funds and ensuring a smooth trading experience.

In this article, we’ll guide you through the steps to identify a legitimate forex broker. By considering factors like regulation, reputation, trading platform quality, and customer support, you can make an informed decision and protect yourself from scams.

Why It’s Important to Choose a Legitimate Forex Broker

The legitimacy of a forex broker is essential for several reasons:

Financial Safety: Legitimate brokers follow strict regulatory guidelines, ensuring your funds are secure and protected. Scams or unreliable brokers can expose you to the risk of losing your capital.

Fair Trading Conditions: A trustworthy broker offers fair spreads, transparent fees, and reliable execution. A shady broker might manipulate trades or impose hidden fees, affecting your profitability.

Regulatory Compliance: Legitimate brokers comply with the rules set by financial authorities, which ensures that they follow ethical practices and adhere to industry standards.

Professionalism: A reputable broker provides access to quality trading platforms, robust customer support, and educational resources, empowering you to become a more effective trader.

With these factors in mind, let’s break down how to identify a legitimate forex broker.

1. Check for Proper Regulation

The first step in determining the legitimacy of a forex broker is to verify its regulatory status. Regulatory bodies are financial authorities that oversee forex brokers and ensure they operate fairly and transparently. Trading with a regulated broker provides an extra layer of protection, as these brokers must adhere to strict guidelines designed to protect investors.

Key Regulatory Bodies to Look For:

Financial Conduct Authority (FCA)– UK

Commodity Futures Trading Commission (CFTC)– USA

Australian Securities and Investments Commission (ASIC)– Australia

Cyprus Securities and Exchange Commission (CySEC)– Cyprus

Financial Services Authority (FSA)– Seychelles

European Securities and Markets Authority (ESMA)– Europe

Legitimate brokers are usually registered with one or more of these regulators. You can verify a broker’s license number on the official websites of these regulatory bodies. If a broker claims to be regulated but cannot provide proof or seems to be operating in a region with no strong regulatory oversight, it’s a major red flag.

2. Research Broker Reviews and Reputation

One of the most reliable ways to assess the legitimacy of a forex broker is to research its reputation within the trading community. Many online platforms and forums are dedicated to discussing brokers, and you can find both positive and negative feedback from real traders.

What to Look for in Reviews:

Transparency: Check if the broker clearly states its fees, spreads, and other costs involved. A legitimate broker will provide all relevant information upfront.

Customer Service: Reviews of customer service quality can give you insights into how well the broker handles issues and queries. Poor customer support can be a sign of a broker’s lack of professionalism.

Withdrawal Process: A reliable broker will allow you to easily withdraw funds. If traders frequently report issues withdrawing money or delays in payments, it could indicate potential problems with the broker.

Broker History: Look for brokers that have been around for a significant amount of time. While new brokers may be legitimate, those with a longer track record often have a proven reputation.

Ensure to check multiple sources to get an unbiased understanding of a broker’s reputation.

3. Verify Trading Platform Quality

A legitimate forex broker will offer a high-quality, stable, and secure trading platform. Popular platforms like MetaTrader 4 (MT4) or MetaTrader 5 (MT5) are commonly associated with reputable brokers. These platforms are known for their reliability, user-friendly interface, and security features.

What to Look for in a Trading Platform:

Ease of Use: The platform should be intuitive and easy to navigate, allowing you to execute trades and monitor the markets without confusion.

Security Features: Make sure the platform offers robust encryption to protect your personal and financial data. Reputable brokers will offer two-factor authentication (2FA) and other security measures.

Advanced Tools: A good trading platform should come with advanced charting tools, technical indicators, and the ability to place stop-loss and take-profit orders. These features enhance your ability to analyze the markets and make informed trading decisions.

Stable Connection: A legitimate broker will offer a platform with minimal downtime and stable connectivity, which is essential for executing trades in real-time.

If a broker offers its own proprietary platform that looks overly complicated or lacks essential features, be cautious.

4. Understand the Broker’s Fee Structure

Legitimate forex brokers are transparent about their fee structures, and they provide clear information on spreads, commissions, and other charges. Understanding these fees is essential, as they can significantly impact your trading costs and profitability.

Things to Check Regarding Fees:

Spread/Commission: A broker’s spread is the difference between the buying and selling price of a currency pair. Low spreads are often a sign of a competitive broker. Some brokers charge commissions in addition to spreads, while others may offer commission-free trading but with higher spreads.

Overnight Fees: If you’re trading positions that last overnight, be aware of swap or rollover fees. Legitimate brokers will explain these fees upfront.

Deposit and Withdrawal Fees: Ensure the broker doesn’t charge hidden fees for deposits or withdrawals. Some brokers may try to lure customers with no deposit fees but then impose high withdrawal charges.

A clear and understandable fee structure indicates transparency, which is a key trait of a legitimate broker.

5. Test Customer Support

A legitimate forex broker should offer responsive and professional customer support to assist you with any issues or queries. Before committing to a broker, it’s a good idea to test their customer support channels.

What to Look for:

Availability: Check if the broker provides 24/7 customer support, especially if you plan to trade in different time zones.

Multiple Channels: A legit broker typically offers multiple ways to contact support, such as live chat, email, and phone.

Response Time and Helpfulness: Reach out with a simple question and evaluate how quickly and effectively the support team responds.

Good customer support is an essential sign of a trustworthy broker that values its clients.

6. Beware of Red Flags

There are several warning signs that a broker may not be legitimate. Be cautious if you notice any of the following:

Unrealistic Promises: If a broker promises guaranteed returns or claims that their trading system can’t fail, it’s a red flag.

Lack of Regulatory Information: If the broker doesn’t provide clear information about its regulation or doesn’t appear to be regulated by a recognized authority, avoid it.

Pressure to Deposit Funds: Scammers often pressure traders to deposit money quickly, sometimes offering bonuses or free trades as incentives. Legitimate brokers don’t use high-pressure tactics.

Conclusion

Choosing the right forex broker is one of the most important decisions you’ll make as a trader. By following the steps outlined in this article, you can ensure that you select a reputable, legitimate broker who offers fair trading conditions, security, and transparent practices. Remember, always do thorough research, check for regulatory compliance, and test the platform before committing large amounts of capital. Safe trading starts with the right broker.

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Volatile markets are a staple of the financial world, but they can be daunting for many traders, especially those new to trading or accustomed to more stable conditions. Volatility refers to the extent to which the price of an asset fluctuates over time. While high volatility offers potential for significant profits, it also introduces greater risk. In such environments, careful planning, strategy, and risk management are essential to succeed.

In this article, we’ll explore what volatile markets are, how to recognize them, and provide actionable strategies for trading during periods of heightened market volatility. Whether you're trading forex, stocks, or commodities, understanding the nuances of volatility can give you a competitive edge.

What Are Volatile Markets?

Volatile markets are characterized by rapid and unpredictable price movements within short time frames. These fluctuations can be caused by various factors, including:

Economic Data Releases: Key economic indicators, such as GDP growth, employment data, and inflation rates, can cause sudden shifts in market sentiment and lead to increased volatility.

Geopolitical Events: Political instability, wars, elections, and government policies can create uncertainty, prompting large price swings.

Market Sentiment: Investor emotions and reactions to news, rumors, or shifts in market sentiment can result in quick, sharp movements in asset prices.

Supply and Demand Shocks: For commodities, such as oil and gold, sudden changes in supply or demand, like natural disasters or political decisions, can cause volatility.

Traders often see volatile markets as a double-edged sword. On one hand, volatility can provide lucrative opportunities to profit from rapid price movements. On the other hand, it amplifies risk, as price swings can lead to significant losses just as easily as gains.

How to Identify Volatile Markets

Recognizing when a market is becoming volatile is crucial for adjusting your trading strategy accordingly. Here are some key indicators of increased market volatility:

Wider Spreads: As volatility increases, bid-ask spreads (the difference between buying and selling prices) tend to widen. This is particularly true for forex markets, where price discrepancies become more noticeable during periods of heightened volatility.

Increased Trading Volume: A surge in trading volume often accompanies volatile market conditions. High volume can be a sign that a market is moving rapidly, either due to news or investor sentiment shifts.

Price Gaps: Volatile markets can cause price gaps, where the price of an asset jumps sharply from one level to another, skipping over several price points in between. This usually happens during market openings or after significant news releases.

Wide Price Swings: Volatile markets will experience frequent and sharp price fluctuations within short periods. For example, an asset may move several percentage points in a matter of minutes or hours, rather than the usual gradual changes.

Strategies for Trading in Volatile Markets

Trading in volatile markets requires a different mindset and set of strategies compared to more stable market conditions. Here are some proven techniques to successfully navigate these high-risk, high-reward environments:

1. Use Tight Stop-Loss Orders

In volatile markets, price movements can be swift and unpredictable, making risk management crucial. One of the best ways to protect yourself from excessive losses is by using tight stop-loss orders. These orders automatically close your position when the market moves against you by a specified amount, ensuring you don't lose more than you're willing to risk.

Tip:

Tight stop-losses can help you preserve capital, but be careful not to set them too close to the entry price. This may result in being "stopped out" frequently due to the natural market fluctuations. Find a balance based on your trading strategy and asset volatility.

2. Consider Using Smaller Position Sizes

When trading in volatile markets, smaller position sizes can help you manage risk. Since the market can swing quickly, reducing the size of your trades lowers the potential loss you might incur during rapid price movements. This is particularly important for traders who want to stay in the market and ride out the volatility without putting their entire capital at risk.

Tip:

Leverage is tempting, but using high leverage during volatile conditions can be risky. A smaller position size will help you stay in the game longer while minimizing the risk of large losses.

3. Focus on Intraday Trading or Swing Trading

During periods of high volatility, it may be prudent to focus on shorter-term trading strategies like intraday trading or swing trading. These strategies capitalize on short-term price fluctuations and are less reliant on the long-term market direction.

Intraday trading

involves opening and closing positions within the same trading day, often based on small price movements.

Swing trading

involves holding positions for a few days to capture medium-term price movements.

Both strategies are well-suited to volatile markets because they allow traders to take advantage of quick price changes without staying in the market for too long.

4. Trend Following and Breakout Strategies

In volatile markets, identifying key support and resistance levels can lead to successful breakout or trend-following strategies. When volatility increases, asset prices often break through key support or resistance levels, signaling the start of a new trend.

Breakout Trading: This involves entering the market when the price breaks through established support or resistance levels. A breakout can be an indication that the market is entering a strong trend, which can be profitable if you catch it early.

Trend Following: Once a trend is identified in a volatile market, riding the trend can lead to substantial profits. Tools like moving averages and the Relative Strength Index (RSI) can help traders identify the strength and sustainability of the trend.

5. News Trading

Volatile markets are often driven by news, whether it’s economic reports, corporate earnings, or geopolitical developments. For traders who can quickly react to news, trading based on economic or political events can yield profitable opportunities. However, news trading requires quick decision-making and the ability to understand the potential impact of the news on the market.

Tip:

Use a reliable economic calendar to keep track of important data releases and events that could impact the market. Prepare for potential price movements and have a plan in place to capitalize on them.

6. Avoid Overtrading

While volatility can present profitable opportunities, it also introduces the temptation to overtrade. When markets move rapidly, traders might feel the urge to open multiple positions in an attempt to profit from every fluctuation. However, overtrading can lead to excessive losses and emotional burnout.

Tip:

Stick to your trading plan and avoid making impulsive decisions based on fear of missing out (FOMO). Successful traders know when to sit out and wait for the right setup.

Key Risks of Trading in Volatile Markets

While volatile markets can offer exciting opportunities, they also present certain risks. Some of the key risks include:

Slippage: Due to rapid price changes, orders may be executed at a different price than expected, leading to slippage. This can eat into your profits or increase losses.

Emotional Trading: Volatility can trigger emotional reactions like fear or greed, which may lead to poor decision-making.

Overleveraging: Using excessive leverage in volatile conditions can quickly lead to large losses if the market moves against you.

Conclusion

Trading in volatile markets can be highly rewarding, but it requires a disciplined approach and solid risk management strategies. By using tools like tight stop-losses, smaller position sizes, and employing short-term strategies like intraday or swing trading, traders can navigate volatile environments with greater confidence.

It’s important to stay aware of the risks and to avoid emotional trading. Successful traders in volatile markets focus on strategy, preparation, and maintaining a calm, calculated approach to capitalize on market movements without overextending themselves.

By understanding the nature of volatility and implementing these strategies, you can turn periods of market uncertainty into opportunities for growth, whether you’re trading forex, stocks, or any other asset class.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Justin

Stocks

Most Asian stock markets fell on Friday, while currencies held steady, as investors remained cautious ahead of the crucial US jobs report that could impact the outlook for further interest rate cuts and the dollar.

MSCI's gauge for emerging market stocks fell 0.5%, touching its lowest since September. The index has dropped more than 25% from its all-time high in 2021.

Stocks in Singapore fell 1.9%, pulling back further from a more than 17-year high scaled on Wednesday. The benchmark was on track for its worst day since early August 2024.

The Singapore dollar slipped 0.2%, while the Thai baht declined 0.3%.

The US nonfarm payrolls report, due later in the day, is expected to show that 160,000 jobs were added in December with unemployment holding at 4.2%.

A much stronger increase in jobs would bolster the case for fewer rate cuts by the Federal Reserve and likely strengthen the greenback, in light of recent data pointing to a resilient US economy.

The prospect of fewer rate cuts and uncertainty regarding President-elect Donald Trump's proposed tariff and immigration policies have led to a surge in global bond yields, supporting the dollar and keeping emerging market currencies under pressure this week.

"Asian markets have shown resilience due to attractive real rates, domestic support, and lack of fiscal concerns. However, we remain cautious on EMFX in the medium-term, given the potential impact of US policy on capital flows and the declining real yield cushion," Citi analysts said in a note.

"We believe the USD rally and reduced EM carry make EMFX vulnerable in the near term."

In Asia, the Bank of Korea (BOK) and Bank Indonesia (BI) will deliver their monetary policy decisions next week. Both central banks have already started their rate-easing cycle, but analysts believe they will likely hold rates this time.

"Outsized FX moves in December will ultimately constrain the BOK from lowering its policy rate in January," Barclays analysts said in a note.

The South Korean won declined 0.3%, while stocks closed 0.2% lower. The benchmark equity index rose 3% in its best week since mid-November, helped by hopes surrounding artificial intelligence technologies.

Equities in Indonesia climbed 0.6%, while the rupiah edged lower.

"While BI would likely prefer to resume its rate-cutting cycle, we believe pressures on the IDR (rupiah) override the central bank's pro-growth instincts," Barclays analysts said.

Markets are awaiting inflation data from India and retail sales and GDP data from China next week.

Source: Theedgemarkets

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January 13th Financial News

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How to Use a VPS for Forex Trading: Boost Speed & Efficiency

What is a VPS?

Why Use a VPS for Forex Trading?

Reduced Latency and Faster Execution

24/7 Uptime

Enhanced Stability

Remote Access

Run Multiple Instances of Trading Platforms

Enhanced Security

How to Set Up a VPS for Forex Trading

Step 1: Choose a VPS Provider

Step 2: Set Up the VPS

Step 3: Connect to the VPS

Optimizing Your VPS for Forex Trading

Conclusion

How to Find Out Which Forex Broker Is Legit

Why It’s Important to Choose a Legitimate Forex Broker

1. Check for Proper Regulation

Key Regulatory Bodies to Look For:

2. Research Broker Reviews and Reputation

3. Verify Trading Platform Quality

What to Look for in a Trading Platform:

4. Understand the Broker’s Fee Structure

5. Test Customer Support

6. Beware of Red Flags

Conclusion

Trading in Volatile Markets: Essential Strategies for Success

What Are Volatile Markets?

How to Identify Volatile Markets

Strategies for Trading in Volatile Markets

1. Use Tight Stop-Loss Orders

2. Consider Using Smaller Position Sizes

3. Focus on Intraday Trading or Swing Trading

4. Trend Following and Breakout Strategies

5. News Trading

6. Avoid Overtrading

Key Risks of Trading in Volatile Markets

Conclusion

Most Asian Stocks Decline Ahead of Us Jobs Data; Currencies Steady

Source: Theedgemarkets

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