Financial crises are becoming more and more frequent. Starting from Black Monday on the 19th October 1987, the world has experienced 9 crises so far. The latest global financial crisis and European sovereign debt crisis is still ongoing.
The world is becoming much more interconnected, therefore it is prone to a small crisis becoming contagious and spreading across different countries. The global financial crisis in September 2008 started because of the subprime mortgage bubble collapse in the United States. The idea of bubbles is that as market is overheating, unsophisticated traders are being attracted and they start buying assets (entering the market) just because it is popular, and just because everybody talking about it. Tulipmania is the first documented example of such an event that happened in the Netherlands in the 1600s.
On the other hand, crises present great opportunities for traders who use an established trading strategy which can exploit the volatile movements of the markets, and the rushed decisions of Central Banks and politicians. For example, the highly significant decision of the Swiss National Bank presented a great opportunity to trade the currency pair EURCHF. The decision by the Russian Central Bank to raise interest rates to 17% in order to help stabilise the Rouble presented a great opportunity to trade the USDRUB. When the Ukrainian Central Bank decided it could no longer support the country’s currency and Hryvnia went to a free fall, that also presented an opportunity.
We need to understand the game theory that works for trading. Decisions of other market participants are affecting the potential outcomes; therefore, we need to incorporate that into our analysis. Many market participants are getting excited and they are making rush decisions and we need to use that to our advantage.