How can Forex crash? History of Forex market declines

The fact that Forex is one of the most volatile and profitable markets in the world attracts many traders. However, Forex market crashes can occur. And it can have knock-on effects on global economies. But have you ever wondered how a Forex crash can happen? Let's dive into what triggers a Forex crash and how it differs from a stock market crash.

Key takeaways

• Unlike the stock market, a Forex market crash does not affect the entire financial system.
• When the Forex market crashes, it doesn't bring down the entire market. Only certain currencies face the pressure.
• The economic recession of 2008 caused a significant decline in the stock market, particularly the Dow Jones.
• The Forex market, being the largest financial market, usually remains stable. Forex crashes are rare and usually involve sharp declines in specific currencies, not the entire market.
• Forex crashes can occur randomly and are often due to specific economic or political events. Understanding these factors is key to effectively navigating the Forex market.
• Sudden accidents are sudden and serious. The sudden drop in the Japanese yen is a classic example where the yen unexpectedly rose against other currencies in a very short time.

stock market Falls vs. Foreign Exchange Market

Unlike the stock market, where a crash often reflects a drop in the value of stocks, a Forex crash is caused by currency values ​​plummeting or soaring unusually. Forex market volatility plays a very important role here.

While the stock market can crash due to company performance or economic crises, the Forex market often crashes due to global economic events or drastic changes in currency market trends.

When did the Forex market crash?

Let's talk about when the Forex market took a nosedive. Now, the Forex market does not collapse in the traditional sense like the stock market does. What we have instead are significant monetary devaluations or extreme volatility.

One of the most notable cases was the global financial crisis of 2008. It was not just a crash in the Forex market, but a crisis that affected every corner of the financial world.

During this crisis, major currencies such as the US dollar, euro and others experienced wild swings. The crisis began in the American real estate market and quickly spread to the financial sector, affecting banks and financial institutions around the world.

As a result, there was a massive flight to safety among investors, and everyone began buying currencies they considered safe, such as the US dollar and the Japanese yen.

Another, rather sudden, example occurred in January 2015 with the Swiss franc. Suddenly, the Swiss National Bank decided to decouple the franc from the euro and boom! The frank shot up. Traders who had bet against the franc were caught off guard and this caused a lot of chaos in the market.

So in the Forex market, a “crash” usually means extreme currency movements caused by large global events.

These events show how interconnected our global economies are and how quickly things can change in the Forex world. It is a market that never sleeps and something that happens on one side of the world can have repercussions on the entire market.

This is why Forex traders must always be alert and attentive to global events, because in Forex, when it rains, it pours!

What causes currency declines?

Currency declines in the Forex market are usually the result of a combination of Forex economic factors and Forex market analysis gone wrong.

Unexpected changes in central bank interest rates, political instability or global financial crises can cause dramatic changes. For example, Black Monday of 1987 was a global financial crisis that significantly affected the Forex markets.

Forex trading carries a number of risks. Forex traders must understand these risks to buy and sell currencies effectively. Among them, the most important is the risk of financial leverage. Using high leverage can amplify profits, but it can also magnify losses, which could lead to a Forex market crash.

Financial Leverage Risk: Leverage Management

Effective Forex risk management involves the use of stop loss orders and careful management of leverage. While leverage can help increase profits from small price movements, it is a double-edged sword.

A sudden unfavorable move can lead to substantial losses, which is why the use of stop losses is essential to protect against unforeseen market movements.

Many Forex traders fail because they have too little capital for the size of their trades. They often make huge, risky financial bets because they want to control a lot of money with just a little capital, or out of greed.

For example, with 100:1 leverage, which is quite common, a price change of just -1% can cause a 100% loss. Every loss, even small ones from early trading exits, makes the problem worse. This happens because these losses decrease the total account balance, which then increases the leverage ratio even further.

Forex Market Crash: Long-Term Declines vs. Sudden Declines

Long-term shocks have less to do with sudden movements and more to do with prolonged situations. economic trends. For example, long-term changes in a country's economic health can lead to a gradual but steady decline in the value of its currency.

For example, Venezuela is facing a major currency crisis as the value of the bolivar plummets following US sanctions that physically cripple the country's oil industry, which was a major source of foreign currency.

On the other hand, we have Flash failures that are sudden and serious. The sudden fall of the Japanese yen is a classic example where the yen unexpectedly rose against other currencies in a very short time, showing the unpredictable nature of the Forex market.

Similar to the sudden drop in the yen, the Swiss franc has also seen significant volatility. Sudden policy changes by the Swiss central bank in 2015 caused the franc to soar, catching many traders off guard.

Sudden fall of the Japanese yen

It's January 2019, just another day in the Forex world, and then… boom! Out of nowhere, the Japanese yen skyrockets against major currencies like the US dollar and the Australian dollar.

This type of sudden rise is what we call a “sudden fall.” In this case, it happened in the blink of an eye, during a time when most traders in major financial centers like Tokyo and New York were probably dreaming; yes, it was during the quietest hours of the Asian market.

Now, you might be wondering, what exactly caused this wild ride? Well, it's a bit of a perfect storm. There were rising tensions between the United States and China over trade, concerns about the US government shutdown at the time, and some shaky global economic data. All of these factors were already making investors a little nervous.

Then comes the low trading volume. As it was off-peak time, there were not many players in the market to absorb the impacts. So when some automated trading systems were activated, they exaggerated the yen's movement even more. It's like throwing a big stone into a small pond: you'll see huge ripples!

This sudden drop was a wake-up call for many Forex traders. It showed how quickly things can change in the forex market. For traders caught on the wrong side, it was a harsh lesson in risk management. He stressed the importance of being prepared for anything, especially when operating in such a volatile market.

In the end, the sudden drop in the yen serves as a reminder that in the Forex world, calm waters can turn turbulent in an instant, so you should always be prepared with your life jacket (or in Forex terms, your solid trading strategy). and Risk management tools.

Conclusion

Understanding the dynamics of a Forex market crash is crucial for anyone involved in currency trading. Unlike the stock market, Forex declines are due to a variety of factors, including economic changes, policy changes, and global events.

Traders must stay informed, practice solid risk management, and stay up-to-date with Forex trading strategies to navigate these waters. Remember, the key to successfully trading the Forex market, which is riddled with risks and opportunitieslies in being prepared and informed.