Understanding Forex Crashes

The million-dollar question that’s always been on any potential investor or newbie trader’s mind is, can a Forex market crash?

The answer to this question is both a yes and a no. Forex markets can’t crash entirely. However, there are some currencies that can crash. Forex market crashes do not happen the same way stock markets crash, affecting only specific currencies.

For instance, there was a time when the Swiss franc was unpegged from the euro by the Swiss Central Bank. This resulted in the soaring of the franc, which saw other currencies being taken down. This is what is referred to as the flash crash. Another example is when the yen experienced an overnight crash back in the early months of 2019, resulting in a takedown of other currencies.

Forex and Stock Markets Crashes-What’s the difference?

·         Stock Market crashes

A stock market crash typically affects stocks. For example, if S&P 500 were to crush, companies making up that index will experience erosion in the value of their shares. The same is applicable in stock indices and markets.

·         Forex markets crash

On the other hand, a Forex market crash typically affects one currency like the USD (U.S Dollar) or the British Pound. Unexpected events trigger Forex crashes, shocking investors, thus forcing them to sell those currencies. However, it is worth noting that Forex trades involve a pair (two) of currencies like the USD/GBP pair. This pits the USD against the British pound, which means the GBP will rally as the USD falls.

As such, those holding the USD will experience a substantial drop in their holding value, meaning they’re experiencing a crash. Traders on the opposite side will experience a considerable gain of their trade’s value. This fact remains true for other currencies affected by a crash. That currencies peers experience colossal gains in their trades’ value in the world currency markets.

That is why it is nearly impossible for the Forex markets to crash in their entirety. The currency pairing means there’s always a currency that’s losing as its peers gain.

Causes of Currency Crashes

When it comes to currency crashes, they are classified into two:

  1. Long term market crashes
  2. Flash crashes

As the name suggests, long-term crashes can even last for months or even years. Flash crashes have been said to take not more than one hour. Even so, no matter if the crash is flash or long-term, those investors and traders holding the losing currencies experience significant losses. Losses that can even leave them destitute.

Key reasons as to why the Forex market is ever going to crash

·         Currencies are a country’s backbone

Each country has its currency which is responsible for supporting its economy.

·         Central banks control forex markets.

Unlike the stock market, which corporate and private investors usually govern, Forex markets are dominated by traders and banks. Banks, including the central bank, trade daily in the amounts of billions in dollars.

·         Forex markets are a source of optimal opportunities.

Since Central banks control forex markets, it does not mean that private traders can’t join in the fun. Traders have options like day trading in a Forex market.

·         Offers stress-free learning

Forex is relatively straightforward for those who want to learn it. Nowadays, there are many different courses, strategies, and guides available from other sources. All you need is dedication and a basic understanding to be a successful Forex trader. However, becoming a pro forex trader might take years.

·         There are many dependable brokers.

The current market is filled with regulated and reliable brokers. These brokers have also played a role in ensuring that the Forex markets thrive in bad and good times.

Conclusion

It is easy to trace back to see what caused a market crash. In most cases, these crashes are caused by unexpected events. Events like global political unrest, natural disaster, economic turmoil, wars, etc. Now, markets are linked closely such that when one market is encountering a given event, domino effects will be experienced.

When there are sell-offs in a security market or any market globally, they follow specific patterns. As a trader, you need to catch those patterns fast enough. That way, you will increase your chances of reaping big time.

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