Could Catastrophic Losses Have Been Avoided on Black Thursday?

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For years many ‘new’ investors were trading in Forex because of the ease at which it is possible to break into the market. Nothing could be easier (could it?) than trading currency pairs based on the relative value of one currency against another and it wasn’t like actually buying any underlying commodity.

Traders were simply, for lack of a better word, wagering against which currency would rise in value and which would fall. However, on Black Thursday, another story erupted when the Forex market suddenly went haywire and billions were lost. Could this have been avoided? There are experts on both sides of the fence. Here are some thoughts on the matter.

Understanding a Black Swan Event

When seeking to understand whether or not Black Thursday could have been avoided the answer isn’t as simple as it seems on the surface. This day is called ‘black’ because it was said to have been a Black Swan event. This type of event is one that is totally (100%) unexpected and if this is the case, the answer would be a simple “No, Black Thursday couldn’t have been avoided.” Why? Because a Black Swan event is unexpected so how can you avoid something that isn’t expected? It would be like trying to avoid a collision with a car that isn’t on the road.

How Traders Lost So Much Money

Many traders lost a huge amount of money due to the massive losses in the Forex market on Black Thursday. Not only did they lose money they had invested but also saw their balances go into the negative. Brokers began hounding traders to pay up those negative balances and this made the event even more catastrophic. One innovative broker that stepped forward offering to provide future trades with a negative balance forgiveness was Synergy FX. This was not only an innovative move but one that ‘could’ cause Synergy problems in the future if another Black Swan event should take place.

Was Black Thursday a True Black Swan Event?

Getting back to the concept of a Black Swan event, many people are just now questioning whether or not it really was all that unexpected. Many ‘experts’ are now coming forward to say that traders and brokers ‘should’ have seen this day coming. The Swiss franc had been doing so well against most currencies that when trading the Swiss franc against the French franc (CHF/FRF) pair, you would assume the Swiss franc to prevail.

Unfortunately that’s not what happened and when it suddenly lost in value, the market went wild and millions lost huge amounts of money. These experts say that this day ‘should’ have been expected because nothing lasts forever and it was only a matter of time for the CHF to lose in valuation within that pair, for example.

So then, could those catastrophic losses have been avoided? There are two schools of thought. If it was a Black Swan event, there was no way losses could have been avoided, but if those experts had seen it coming, why trade and lose? That is the question we should be asking them. The final answer rests in understanding whether or not Black Thursday was really a Black Swan event.