It goes without saying that what happened in Japan – and is continuing to happen there – is a tragedy. As is often the case with these sorts of developments, though, it’s also an opportunity for to reflect and learn. In this particular case, I want to use recent market developments to make a point, particularly to all those forex detractors out there.
Tuesday the NIKKEI 225 index in Japan lost 10.55% on the day. That’s a very big one day drop, and we can point to examples of even bigger ones in major stock indices from years gone by. The Crash of 1987 certainly comes to mind. The Dow lost over 22% that day. It’s worth noting, however, that none of the major currency pairs has ever moved as much in one day as the percentage the NIKKEI lost in Tuesday’s session.
Here are the worst 1-day changes found in the Reuters data set which goes back as far at 1971 for some pairs.
It should be noted that these figures aren’t just looking at close-to-close change. They also factor in close-to-high/low changes to get the maximum percent difference covered in a single day. The NIKKEI closed Tuesday at 8605.15, down from 9620.49 on Monday. Tuesday’s session low for the index was 8227.63. That means at its worst it was down nearly 14.5%. That’s a 45% bigger maximum % change than the largest in the table above.
Actually, it’s worth noting that forex data before the middle 1980s is a bit spotty, especially where highs and lows are concerned. Here’s how that table would look if we only went back to 1986.
These figures probably are more appropriate to use in any case given that they better reflects how active and liquid the forex market is today. Daily volumes now are much, much higher (literally multiple trillions of dollars) than they were in the 70s and 80s.
This is one more piece of evidence to counter those who call forex a very risky market (see Looking at Volatility Across Markets for more on the subject). Of course if you’re highly levered, even a small move can do major damage to your account equity. That’s not the fault of the market, however. It’s your poor use of a tool.
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