Central banks are relied upon to make predictable changes and cause little surprise. However, the decision last month by the Swiss National Bank (SNB) to remove the four-year peg of 1.2 to the Euro put the forex market into tumult. The SNB’s decision reminds us of the volatility built into the forex market, a lot of customers suffered losses in excess of their deposit and even large brokers (with many years experience) lost a lot of money that day (i.e US FX broker, FXCM, Interactive, IG group).
Should the forex market have predicted the SNB’s actions?
There was no announcement by the SNB beforehand of this U-turn in policy which is very unusual for a central bank. There may have been warning signs, like the referendum in November that would have made it difficult for the SNB to increase its reserves, or the expected introduction of “quantitative easing” by the European Central Bank. However, by the volume of losses made by brokers on that day it is clear that the market was not expecting this decision by the SNB, although there are reports of some companies selling CHF at a high level in December.
What can an amateur forex trader learn from SNB’s actions?
What an amateur forex trader can take away from this incident is that the forex market is not a ‘get rich quick option’. Although forex is a leveraged market, with as little as 10% of the bid price needing to be actually put up, the consequences of actions such as SNB’s are amplified by this leveraged factor leaving potential investors with extreme losses and possible bankruptcy.
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