Early this year the Swiss franc soared 30% after the Swiss National Bank (SNB) ditched the cap on the currency's value against the euro. The bank said the cap introduced in September 2011 was no longer justified.
Additionally, the SNB also cut the base interest rate from -0.25% to -0.75%, thereby raising the amount investors pay to hold Swiss deposits. The move caught several key global financial industry personalities and corporations by surprise including the International Monetary fund head Christine Lagarde.
However, it is the foreign exchange market that endured the largest impact with several broker-dealers, corporate traders and retail traders alike who held long positions on EUR/CHF currency pair incurring massive losses.
The pair dropped from 1.20 to exchange at 0.8052, but soon recovered to 1.04. Nonetheless, the damage had already been done, at least to traders who chose to cut losses out of panic after the initial plunge.
Big players got hit hard
Generally, this damaging move did not spare anyone. Even large forex brokers such as Forex Capital Markets (FXCM, Financial) felt the impact along with IronFX and others, including those who see themselves as pro traders. All this came because due to that performance cap, many had assumed generalized long positions on EUR/CHF.
However, the biggest lesson here was that despite what market conditions suggest, the forex trading market has no master and its dynamism makes it highly unpredictable no matter what the so-called pros will tell you.
However, this does not mean that as an aspiring trader you should avoid the market entirely. In fact, it stresses on the importance of continuous learning to keep pace with changing market environment. In isolation, it is true that a few traders might have managed to benefit immensely after the Swiss franc soared against the euro, but then again those are largely few isolated cases.
So how should traders prepare in the future for such abrupt events?
It is virtually impossible to predict whether a central bank would make a decision in the same way the SNB did, but through forex education, traders can watch out for signals that tend to suggest the possibilities of such decisions.
For instance, the Swiss National Bank had placed a cap on the Swiss franc advancing against the euro. However, following a continuous plunge of the euro due to the European financial crisis, the bank had no choice but to remove the cap. It had become meaningless, which was the official message.
Now, from the point of view of a novice trader, few would be tempted into joining the forex market especially after it clearly seems that no one can accurately predict what could happen in the future. However, with forex education, it has also been revealed that traders can make money as long as they stick to their trading plan, and avoid being swayed to making rush trading decisions. As noted in this write-up, the traders who lost the most following the EUR/CHF plunge are the ones who sold shortly after the decision was made. However, for those who remained calm, they may have managed to recoup some of the initial loss.
As such, it is important to learn forex trading as part of a process before getting started with the actual trading. This may not mean that you are going to make money out of trading, but it surely does raise the chances of success once you begin trading.
Conclusion
The bottom line is that over the last two decades, investing has evolved and now, many people are embracing the changes that have taken place. Importantly, the advances in technology have made it much easier to start trading as mobile devices are now viable tools for trading on the go. This means that most people are likely to be tempted to trading online regardless of their experience and knowledge.
This exposes them to the dangers of online trading that arise from increasing volatility of currency markets. This further stresses on the importance of forex education among traders, and as demonstrated by the plunge of the EUR/CHF, no one can ever accurately predict what would happen next in the currency markets. Therefore, this implies the need for risk management lessons on a continuous basis.
Everyone can trade the forex market, but it is often stated that forex trading is not for everyone. One of the main factors behind this statement is the level of risk involved in margin trading and as such, the increased potential for loss. The good side of this is that, traders do not need as much money as they would need when it comes to trading other financial instruments such as stocks.
