It’s near-impossible to predict movements in the global market with 100% accuracy, mainly because there are many moving parts. Recently, policy shifts and events like inflation, interest rate changes, international tensions, and the aftermath of the pandemic have all made the market more uncertain. Stock prices are volatile, while bond yields and cryptocurrencies fluctuate wildly, so knowing where to turn in all this chaos is challenging for investors, whether you’re a pro or a novice.
That’s where forex trading comes in. Unlike other markets, the forex market is vast, liquid, and always moving. These factors make it an excellent option even when everything else in the global market feels unstable. So, how does the Forex market stay stable when other markets don’t?
Understanding Financial Market Volatility
Volatility might sound complicated, but it’s just a fancy way of saying that the price of something has gone up and down quickly.
Imagine the price of your favorite snack suddenly doubling in price one day and dropping the next; that means you can’t predict its cost on any given day. That’s a simple way to think about “volatility.” In the financial world, it’s expected that prices go up and down, but when they do so with a degree of intensity and within a short period, we have what we call “volatility in the financial market.” Inflation, changes in interest rates, significant political events, or geopolitical tensions can cause volatility. These all create uncertainty, making the global financial markets feel like a trip on a rollercoaster: one minute, you’re up, and the next, you’re plummeting down.
Over the past four years, we’ve seen some record-breaking swings in financial markets. We’ve seen stock prices swing all over the place. Crypto assets, especially cryptocurrencies, have been worse, with prices soaring one week and crashing the next. Experts that track volatility with something called the VIX (nicknamed the “fear index”) have also seen that it has spiked above the safe 20-point mark repeatedly over the last four years. Right now (December 2024), the VIX is at 13 points, but just last month, at the beginning of November, it was 22. This indicates that investors are not very confident in the market and that volatility is still lingering.
When markets are this unpredictable, it can mess with your investments, and your stocks can lose value in the blink of an eye. Even bonds, which are supposed to be lower-risk investment options, can take a hit, especially when interest rates are high. That’s why more and more people are turning to forex trading to take advantage of these market swings instead of being at their mercy.
What Makes Forex Trading Different?
The forex market is a global market where you simultaneously trade one currency for another. Think of it as swapping dollars for euros when traveling but on a much bigger scale. A nice thing about the forex market is that it is open for a whole day (24hrs), five days a week. This means that, unlike other markets, you’re not stuck waiting for a bell to ring for you to start trading. Moreover, it is decentralized. That means that it’s not tied to just one economy or country. Instead, it is a reflection of the entire world’s financial system. This can offset many risks, especially when market conditions are shaky. The result is that in forex, you can trade whether the market is going up or down.
How Forex Offers Stability
It’s only human to worry in times of economic instability, but with time and experience, the focus shifts to maximizing opportunities in the market. That’s where forex trading shines. It possesses several unique features that allow it to be a form of stability during times of volatility. Let’s explore how this is possible with forex:
High Liquidity and 24-Hour Trading
Trillions of dollars are traded daily on the forex market, making it the most liquid market in the world. What does that mean for traders and investors? It means buying or selling currencies whenever they want is easy. The forex market is open 24 hours a day, five days a week, moving with the sun. So, it starts in Asia, Europe, and finally, the U.S., with overlapping trading sessions. This can all be beneficial during volatile times for two reasons. On the one hand, it allows trades to happen smoothly and without too much price slippage (when the price you get isn’t the price you expected). It also means that investors have more control as they can jump in and out of the market at any time, bringing stability to a volatile market.
Decentralized Market
The forex market doesn’t work like the stock market. On one hand, the stock market always has a central exchange like Wall Street in New York. Conversely, the forex market is decentralized, meaning trades happen directly between people and institutions worldwide without a physical place tying it all together.
Forex is highly flexible, so there’s always someone buying or selling. With technological advancements, these trades are now becoming increasingly accessible anytime, anywhere. As such, the forex market has served as a stabilizing force in a volatile financial landscape when other markets might freeze up. Think of it as having a backup plan that keeps running no matter what’s happening.
Hedging Against Market Instability
Forex isn’t just for trading currency pairs. It is also an excellent medium for big companies that deal internationally to protect themselves from colossal currency swings that tend to occur in volatile markets. Imagine you own a U.S. company that sells products in Europe. If the euro suddenly drops in value, your profits will take a significant hit. You can hedge by buying euros in the forex market to avoid that. You can also do this by retail/individual traders to offset risks from other investments, like stocks or bonds. It’s a safety net when markets get shaky. This makes forex a safety net when markets are unpredictable, helping businesses and individuals.
How Forex Saves the Day for Financial Stability
Forex trading offers a rare chance to remain stable when everything else gets chaotic. While stocks and bonds can crash unexpectedly or due to various policies and industry changes, the forex market thrives on movement, offering liquidity and flexibility that other markets can’t match. However, using these forex market features to your advantage during volatility requires careful planning and consultation with experts. Nonetheless, the forex market is a powerful stabilizing force in the global financial space.
