Can The Forex Market End?
The difference between stock exchange crashes and forex market crashes
Collapses within the securities market differ from those we witness within the currency market therein the collapse of the exchange usually affects most stocks, as long as all of them trade the identical currency. for instance, the collapse of the S&P 500 index will often cause sharp declines in most of the companies’ shares listed during this index, and this is applicable to any or all stock markets and other indices.
On the contrary, the collapse of the currency markets usually affects one currency, like British pound or the US dollar, and it always appears because of unforeseen events that make a shock for investors and push them to sell the currency in question as quickly as possible. However, forex trades usually involve two currencies, like the GBP / USD pair, meaning Brits pound against the US dollar, which suggests that the dollar will rise at a time when the pound is declining.
Based on this scenario, while the pound buyers will suffer from sharp declines within the value of their trades during the aforementioned crash period, those sitting on the opposite side of the discount will make huge gains after taking advantage of the increase within the US dollar against the sterling.
The same scenario applies to the other currency which will suffer a crash, as its counterparts will achieve strong gains at the identical time that the worth of this currency is eroded within the forex market.
The fact that the forex market includes an enormous number of currencies, each representing a distinct country and region, implies that the whole market can’t be subjected to a state of collapse because each currency trades in an exceedingly pair against another, and thus the counterpart will enjoy the collapse of the opposite currency.
What causes the collapse of currencies?
Now that we’ve proven that the forex market as a full cannot collapse overnight, while some currencies may individually experience sharp declines from time to time, let’s take a glance at the foremost prominent crashes within the currency markets in recent years. First of all, we’d prefer to remind you that there are two main forms of price crashes, the primary being long-term lows, and therefore the other being intraday lows. Long-term downturns typically last for months, possibly years, while momentary crashes occur within seconds and typically last no over an hour.
Regardless of the character of the value collapse, investors within the concerned currency incur heavy losses which will sometimes cause the erasure of their accounts entirely.
Collapse of currencies within the future
The collapse of the currency within the long term is usually linked to the socio-economic conditions prevailing within the country in question, so it always lasts for long periods. These cases of currency collapse appear in most cases when the concerned country faces a significant crisis, like a military coup, out of control inflation rates, or other major economic challenges.
For example, Venezuela is facing a severe crisis because the bolivar’s value has plummeted within the wake people sanctions that mainly target the country’s industry, which is that the main source of exchange in Venezuela.
The regime in power in Caracas is additionally controlled by an authoritarian government isolated from the international community, which has severely damaged its economy. this is often one in every of the foremost prominent samples of a long-term currency crisis, which takes a few years to resolve.
Nevertheless, this kind of long-term currency crises often appears in developing countries that lack strong institutions, and are managed in most cases by autocrats who apply populist policies that don’t satisfy investors, which ultimately negatively affects the country’s economy and should cause its collapse. .
Beware of momentary crashes
Forex traders were exposed to a powerful shock thanks to the sudden and sudden collapse of the japanese yen on January 2, 2019, because the Japanese currency jumped by 3-5% against other currencies, like the US dollar, in precisely eight minutes.
This sudden jump resulted in traders holding open positions within the Japanese Yen experiencing / making significant losses / gains. This price jump failed to last for less than a brief period, but it caused heavy damage to most traders, because it led to the activation of stop-loss orders in their short positions, which led in some cases to zeroing within the accounts of some within some minutes.
Most currency analysts attributed this sudden jump to automated trading systems, especially in light of the absence of any exceptional events at the economic.
Some experts noticed that the value collapse occurred between five and 6 within the evening big apple time, which is sometimes called Magic Hour, because of the shortage of liquidity during that period because of the closure of latest York markets at a time when Japanese markets haven’t yet opened.
Some experts also pointed to Apple’s announcement in the week of its weak revenue forecast because of the slowdown in sales in China after the close of the the big apple session. This announcement may have sparked investor concerns and, in turn, stimulated this momentary meltdown.
It is important to notice that intraday crashes don’t seem to be a brand new thing within the currency markets because they need often been repeated within the past, while the forex market, as mentioned above, isn’t subjected to an entire collapse at just one occasion. Nevertheless, the interesting thing is that the repetition of unexplained momentary crashes, which aren’t lacking for clear reasons, has become a more common phenomenon within the past period. that’s why we recommend that you simply always follow the sound rules of risk management when trading within the forex market so as to avoid exposure to heavy losses when the occurrence of intraday crashes.