Page 39 - Ultimate Guide to Currency Trading

The 1920s Bubble

In the 1920s there was another bubble. This one was a bubble in the equities markets. The stock
markets across the world were going up and up daily, which led to more and more people investing in
the market. Liquidity was available as many people who speculated in the U.S. stock market bought
their stock on margin. In the 1920s an investor was able to use 10:1 gearing on his stock purchases.
This means they could buy $10,000 worth of stock for $1,000 in cash (currently the margin on stock
purchases is 1:1.5, or $1,500 worth of stock for $1,000 in cash). In the end, the stock markets of the
world came tumbling down in value. As they crashed, they brought economic destruction to those
who had their life savings invested in the stock markets.

The 2008-2009 Bubble

In 2008 and leading into 2009 there was another bubble. This one hit closer to home as it not only
involved the U.S. and world stock markets, but also was rooted in the falling values of the U.S.
residential housing market. Before this fall in value, the U.S. residential housing market was going
forward in full force. It seemed as though anyone could get a mortgage and it seemed like everyone
had a home of his own. Through a series of unfortunate events, the housing bubble burst, leaving
many "underwater" in the debt/equity ratio of their mortgages.

Speculative bubbies are seen in almost every form of trade instrument. Some develop slowly;
others come and go in a year or less. Bubbles can be very hard to detect when they are ascending, and
many can get caught up in a quickly deflating or popping bubble. Bubble happen in the Forex world
too, as a currency pair can be a market darling for quite some time, and then all of sudden, it is no
longer in favor. Sometimes it is the whole market that is under the influence of a bubble; other times
it is one sector, or in the case of currencies, one economic region or group of currencies.