Why Trading Forex Is Preferred During A Financial Markets Crisis
Forex Blog Articles
What if you could invest and not fear the crashes and panics that grip the stock market every now and then?
In 2008, the stock market registered one of its strongest drawdowns in many decades. Precipitated by the deregulation of banks, seen from a distance, 2008’s devastating crash had been building for a while. All the major markets took a hit as seen on the leading indices such SP500, DAX, NIKKEI, and although many people felt it suddenly, what actually transpired was a drawn-out string of events building to a crisis.
Now in 2019, everyone seems to be talking about a similar crash that is supposed to come sometime soon. If history is to serve as a guide when the financial market is in crisis many people will be compelled to run away from financial investments.
During a market collapse crisis, being invested in stocks can be a deadly trap. The exchange may disallow short selling and off-market hours events may translate to major daily gaps where investors are left helpless. Stocks can instantly drop in high percentages. Wise investors have only one option, that is to be on the side-lines with money that can be left passive, with no investment avenue.
However, there is one market that stays relevant for trading. While the stock market might be in free fall or going through rough periods, it is the Forex market which always provides value and relevant investment opportunities. In lieu of a stable stock market, trading the Forex market is the best alternative for getting into and succeeding in the financial market and to continue actively investing.
While they both exist under the auspices of the financial market, there are several key differences separating the forex market from the stock market.
In January 15th, 2015 The Swiss bank had cut its currency 18%. That was the most aggressive intervention made on the major economy in recent memory. This one of a kind rare mega event was unprecedented in recent memory and stands to show just how stable the forex market is – as it is an event that likely to occur only once in few decades. In the stock market, mega-events like this are not necessarily common but happen far more often and to a much higher degree of severity.
While it takes one bit of bad news to plummet a stock, in the forex market, it takes an absolutely outlying event to crush the market. It is incredibly rare to see over 2% drop in the forex market. For a major currency to get crushed the way the Swiss did, would take a truly amazing event.
The Stability of Trading
Unlike a wide-open stock market, The5ers are only trading currencies from the 8 major economies in the world. All these combos combined, create only 27 different pairs of forex exchanges. All of these currencies have historically tended to be very balanced against each other.
Even when there is a trend, a value change of 5% to 10% can be achieved in a months time.
In a crisis market, you better reduce the use of Forex leverage. Forex will not lose against you or risk you with more than 1% a day, 2% at the most. A stock like an amazon (or Facebook) could drop 3% a day and it would be normal. In forex, a 1% or more change is a stormy day.
Despite these facts, the preconception is that forex is riskier and more volatile than stocks. It’s actually the opposite when you don’t use leverage.
Continues Market Hours
Another reason why the forex market is favorable at stormy times is that it’s a continuous market. Since it’s open 24 hours/5 days week, whatever happens, that might slightly affect your investment, the forex trader can always go into the trading-platform and get an execute for a market order. If you want to add, lower, modify your risk, whatever, you can do this 24 hours a day.
Unlike the stock market, The Forex market has no off-market hours during the week. This means that there are no events happening while traders can’t respond like there are with stocks.
Off Market Hours Frustration
In Earning Reports Season many companies release their earnings reports after market hours so investors can’t respond. Gaps in the market become a difficult area to manage for stock investors.
Between the closing and opening of the market, you might have a gap of 2%, 3%, and it can go against you. During these hours, there’s nothing you can do regarding your investments.
With questions of stability and near-constant available access, it is clear that for a more consistent, risk-averse trading experience, the forex market stands shoulders above the stock market
Frequency of Daily Gaps in a Crisis Market
In a crisis market, like 2008, these gaps are more often and frequent. But in forex, which is a continuous market, you can access your investments 24 hours a day and make adjustments according to whatever the market tells you, you are not subject to these suddenly appearing chasms.
During a strong crisis – major exchanges forbid short selling, to prevent massive erosion. You won’t be allowed to invest in a short, your only option is to exit your position and stay uninvested for as long the crisis lasts. The reason short selling is disallowed is that the exchanges do not want to accelerate the drop in the value. As an investor, it means you can only sell your position and be outside the position without the ability to invest at that time. If the market is down for a while, you would not want to be in the market and you can’t be invested.
In forex, you can go either way. The fact is, in forex, there is no shorting. For example, when you buy the euro against the dollar and then, in turn, want to sell euro, you’re then just buying the dollar. There is officially no such thing as a short in forex.
Being active in the forex market allow you to take any position for any direction with no limitations whatsoever.
Capitalizing on Crisis in the Forex Market
At any market condition, forex will always available to trade, go in and out, and always for 24 hours a day. You will be allowed to buy and sell whatever you feel like. There is nothing that will prohibit you from shorting or being in such a position.
Investing in stocks on crisis times, you might find yourself taking painful losses or standing on the sidelines, not putting your capital to work. There is no possibility to invest in the down trading market in stocks. There is, however, a way to utilize crisis in the world economy.
Key Levels Washed Out
During the crisis, forex levels tend to break more easily. A lot of excitement or impulses in the market levels that need to be valued tend to break. Low time frame levels or former tested levels will break because the volumes will be much stronger.
Trend trading is, therefore, more likely to happen. If there was a long time of ranging, very soon you’ll see a conviction towards one direction on which you can consistently rely.
Surviving the Volatility Storm Trading Forex
During stormy times, the market tends to be very choppy and tricky. It is highly advised that you wait outside the action and take higher probability trades. Be constantly aware of the news and anything and everything that might affect the market.
Since there is no way to manipulate or maneuver your holdings during this time, try to avoid holding positions over the weekend. During the weekend something might happen that you can’t react to until Monday morning. No one wants to check the market and see that something devastating has happened while they were unable to act.
The bottom line is, be aware of the raging market. Capitalize on forex’s allowance of very low leverage, and flexibility it offers during stable and crisis times. Take advantage of a market that allows shorting, and which provides a 24/5 continuous market.
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