Introduction
If history has taught us anything, any market with trillions of dollars can be susceptible to wild swings. A forex market crash at any point isn’t out of the question, whether it occurs in 2023 or 2033. We have experienced this first-hand in the stock market during the 2008 crash and, more recently, during the first wave of Covid-19.
Establishing does market crash effect forex or not is something many traders ponder, especially if they trade across multiple assets, as they can bleed into each during times of gloomy market sentiment. These crashes were more centred on other markets, such as stocks and cryptocurrency, as their worth is tied to the real value of companies and assets.
Many economies worldwide have hit a major slump of late, and many analysts and fiscal organisations, such as the IMF, anticipate that this will continue for at least another twelve months. We will establish today whether or not a forex market crash is likely to occur during this period and some of the factors that need to be in play for it to occur.
What Is Forex?
Starting with the basics, forex is simply when foreign currencies are bought and sold as pairs. Most key pairings use the US Dollar, but other major pairings also include the Euro. Forex traders take advantage of small price differentials between pairings to make a profit. If you are a beginner trader, you may wonder what the best techniques are. You can find some of our detailed insights below, which may help you navigate the market as a beginner.
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- Algorithmic forex trading for beginners
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Can Forex Crash Often?
As many of the top world economies have struggled to maintain growth this year and are battling high inflation and recession, this has set the tone for a fairly stagnant period on the forex market. With so many countries in the Eurozone, Great Britain and the United States all struggling, this has been highlighted in the forex trading figures.
Trading forex may not be the most suitable asset to trade during a market downturn. Some traders and analysts opt for other types of trading during this period, such as options trading. However, others opt to trade in other markets, such as cryptocurrency and commodity markets, such as gold and silver. Some traders believe it is more of a question of “when will forex crash?” and not if it will crash.
A crucial point to note is that any investment can be volatile. Even though the cryptocurrency market is considered the most dangerous asset, all markets carry heightened risk. Your capital is at risk, even if you perform the necessary research beforehand. This is what makes the markets so simultaneously off-putting and attractive at the same time. Some investors relish the opportunity to enter the market during stagnation, while others will sell up and shut shop until the sentiment becomes more positive.
For those traders who trade on negative emotion and can allow market sentiment to get the better of them, a forex market crash might cause extreme worry. However, it would be an apocalyptic scenario for the conditions to exist where a complete sustained forex crash takes place. If the US Dollar, Euro, and several other world currencies crashed, this would signify something horrific taking place on a global economic stage.
What About Specific Forex Markets?
If anything, this is more likely. During Black Wednesday 1992, there was a run on the GBP. Some forex traders made hundreds of millions of dollars from this news. These serious incidents are not considered flash crashes. The situation at the time was one of sheer panic. Flash crash forex trading can result in profit for some traders. However, many traders lose money during flash crashes or more serious incidents like Black Wednesday.
Similarly, Black Monday in 1987 caused the American Dollar to plummet. Both currencies suffered immensely before rallying again. Those forex traders that managed to time the dips in these specific forex markets came out the other side with substantial profit. However, the results can be catastrophic for many forex traders, especially retail traders who do not use anywhere near the same amount of capital.
What Is A Forex Flash Crash?
A forex flash crash can be a devastating trading period that can often play out over a short time. It is usually limited to several minutes. However, billions can get wiped off the value of certain currencies. A combination of factors can result in a forex market crash that happens so suddenly and unexpectedly. Many analysts blame the enhanced use of automated trading software and algorithmic trading.
However, many traders use automated trading software to trade more effectively. Institutional investors that place gigantic buy and sell orders can often crash the price if a collection of them has set a specific price for a sell order. Market analysts often predict an ideal sale execution point in a certain range. If these sell orders occur in quick succession across multiple investors, they can quickly wipe out an asset’s price.
Some commentators have noted that these sharp forex market crashes are becoming more worryingly frequent. The largest forex flash crash took place in Singapore in early 2019. It caused a reverberation of these markets and wiped a total of $41 billion off the foreign exchange market.
What Is Boom And Crash In Forex?
The boom and crash index is a specific index that uses synthetic indices. It measures the impact and scale of any highs and lows, especially forex market crashes, that usually take place over a short period.
Some of the topics we have discussed today will have been measured using the boom and crash indices, and traders use it to try and decipher their strategy when trading forex. It usually uses pips to deliver the statistics in real-time to traders. They will then implement that knowledge into their strategy. You can read our detailed insight page to learn about how pips work.
Conclusion
The forex market can flash crash many times a year. The main defining feature of a major crash is a consistent negative loss over a few hours, days or weeks. The two market crashes in 1987 and 1992 identified issues within specific foreign currencies and showed why the forex market crash was so damaging.
Although a flash crash can wipe billions off the market in a matter of minutes, when it recovers back to its normal levels by the close of the business day, this isn’t usually a huge panic moment. However, if a forex market crash occurs in 2023, it will likely be driven by external factors. One catalyst may also set off a chain of events where a crisis is hits one of the major world currencies.
