The key to successful forex trading is typically not found in individual price actions but instead focusing on realistic, long-term trends.
This is especially true when working with an instant funding prop firm; risk management strategies are a prerequisite, risky strategies such as trading the news are somewhat restricted and the staging structure is based on consistency rather than wild swings in profitability.
This fits the general state of the forex market; currencies do not tend to be especially volatile outside of particularly extreme economic events.
However, because most forex trades are undertaken with significant amounts of capital involved, even small movements in pips can have a gigantic impact.
This means that when there are huge currency swings, the consequences can reverberate for decades.
Deutsche Mark (DEM) – Great British Pound (GBP) – 16th September 1992
It is impossible to discuss significant forex events without exploring the infamous Black Wednesday, the collapse in the value of the pound on 16th September 1992, in part because it was extremely aggressive forex trading that arguably changed world history.
There were two reasons for the huge swing, but the fall in the value of the pound is discussed far more than the flight to the Deutsche Mark, a unit of currency that no longer exists.
In the early 1990s, as part of an aim to bring Europe closer together economically, plans were in motion from the late 1970s up until the early 2000s to connect European currencies using an Exchange Rate Mechanism (ERM) in preparation for a single unified currency.
For the pound, this meant that after the UK entered the ERM at a rate of DM 2.95 to the pound, they had to keep the exchange rate at over DM 2.773 to the pound.
The goal was to provide stability, but several forex traders, most notably Stanley Druckenmiller and George Soros of Quantum Fund, noticed the relatively poor economy of the UK at the start of the John Major Ministry and the depreciation of the pound and realised how precarious their position was in the ERM.
The result was one of the most audacious and aggressive short campaigns perhaps ever seen in the history of forex, which created a vicious cycle that all but guaranteed that the pound would crash out of the ERM.
From DM 2.7784 on 16th September when the announcement that the UK had left the ERM, the pound plummeted to a low of DM 2.393 on 5th October, marking one of the biggest pip moves in the history of forex and netting Quantum Fund over a billion pounds in profit.
The consequences were gigantic and altered the course of British history. Whilst the ruling Conservative party were narrowly leading in the polls following a victory in the 1992 general election, they would not win a majority in an election for 23 years and were humiliated in a landslide in 1997.
It also stopped the UK from joining the European single currency and it has retained the pound ever since.
Argentine Peso To United States Dollars – January 2002
The infamous corralon (“big corral”) was the result of a disastrous attempt in Argentina to peg the value of the Argentine peso to the dollar, which was itself an attempt to avoid the intense hyperinflation the Peso had seen from 1975 up until 1990.
Following the Argentine banking crisis of 1990, the exchange rate in Argentina was fixed by law to one dollar per peso, an economic policy akin to King Canute telling the tide to go back.
Much like the ERM, this was designed to provide stability, but the poor execution of the policy meant that whilst it initially worked to curb inflation, businesses and wealthy individuals were by 2001 converting pesos into dollars and taking them out of the monetary system.
Fearing a bank run, Argentina’s Minister of Economy Domingo Cavallo instituted what became known as “Corralito”.
This limited cash withdrawals to 250 pesos per week ($250), which made the issue worse as most Argentinians did not have a bank account and most businesses did not accept debit cards, which were excluded from the restrictions.
Following a period of violent civil unrest which led to the resignation of President Fernando de la Rua on 20th December 2001 as well as his successor a few days later, Eduardo Duhalde brought an end to the uprising by ending Corralito.
This turned out to be a case of jumping out of the frying pan and directly into the fire, however, as the peso was forcibly devalued and then floated on the forex market, where its value promptly plummeted by 75 per cent.
Outside of periods of outright hyperinflation, it is one of the worst drops a currency has seen in recent years, and there are potential forex investors who made a lot of money by seeing the unstable equilibrium as it was happening.