Until Black Thursday rolled around, Forex traders had no idea just how volatile the market could be. Whilst no one hides the fact that Forex is a volatile market, no one had any clue just how explosive it could be until the Swiss National Bank did away with its floor on the EUR/CHF pair this past January. As a result, many traders not only lost a great deal of money but actually ended up owing their brokers money due to negative balances. This pandemonium had been virtually unheard of in the past but several key lessons were learned which affect Forex traders going forward. Here is some of what we are now aware of.
Central Banks Make Their Own Rules
Too many traders take the word of Central Banks as the gospel of Forex trading. Listen to what they have to say but don’t rely 100% on their word. Black Thursday was the result of the Swiss National Bank telling reporters that the floor of the EUR/CHF pair needed to stay the same. Three short days later they were singing a new tune and the results, without trying to sound cliché, are history.
Watch Out for Leverage That Is Extremely High
When it comes to leverage, it is good to remember that old adage about something that sounds way too good to be true. Listen to your gut here because it probably is. When leveraging at 100.1 on a currency pair such as the EUR/CHF that had strong binary risks, you can expect to take a huge loss if all goes south – and we all know, on Black Thursday that’s just what happened.
Stop-Loss Orders Can’t Be Relied On
A Stop-Loss order is one that is in place to protect the trader if the underlying security reaches a certain price. At that point the security is supposed to be sold, getting the trader out of the line of fire before losing their virtual shirts. Unfortunately, in a market with the amount of volatility experienced on Black Thursday, traders can’t always exit when they want as thousands (if not millions) of traders had the same exit strategy and were scrambling to exit at the same time.
Impact of Unsuccessful Stop-Loss Orders
When traders couldn’t get out on time they not only lost their entire investment but realised a negative balance as well, owing their brokers huge amounts of money. This lesson learned prompted Synergy FX out of Australia to begin offering a hybrid platform in which negative balances are to be forgiven. Of all lessons learned, this may be one of the most valuable.
Of course there has only been one Black Swan event of this magnitude in the history of Forex trading, but Black Thursday led to the awareness that it could happen again. These lessons we learned are extremely valuable going forward and every trader, new or seasoned, should keep them in mind before entering the market. If we don’t learn from our mistakes the next event could be even more disastrous so take ample time to study what went wrong and take steps to avoid making those same mistakes that lost trillions for traders around the globe.
