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Chapter 11. Black Swans and Rogue Trader... > The Inherent Instability in the Fore...

The Inherent Instability in the Forex Market

Swings in currency value always seem obvious in hindsight, but those caught up in them almost never know exactly when, or how much, a currency will move. That is because the “X factor”—the element of the unexpected that is present in all markets—is far more potent in the foreign exchange market.

Clive Crook, in the Economist (May 2, 2003), explains why. It is conventional wisdom that increased trade in goods and services is beneficial because it offers consumers more choices. Americans, for example, can match their tastes and preferences to a wide variety of automobiles, mostly because of open trade. The Forex market is good for the same reason—it offers people more choices. They can also invest in currencies from around the world, each with different strengths and weaknesses. But, as Crook darkly notes, the increase in the number of choices also increases the chances that the investor will make a bad investment. And whereas most people can tell a well-made car from one of poor quality, currencies are far more difficult to understand and judge.


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