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The Psychological Factors of the Forex Market
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Thursday, April 30, 2009 GMT
By: Hillel Fuld
There are so many factors that influence a currency's worth from the economic, political, and even social status of the country at hand. As opposed to other global markets, the Forex market is so big, no one person can have any serious affect on the rise or decline of any currency.
However, the opposite is not true. Many different aspects of the Forex market can influence Forex traders and how and what they decide to trade. Before we get into the psychological factors that influence Forex traders, we should talk a little bit about the primary means by which traders decide what to trade.
Forex analysis is of utmost importance when deciding what position to open or close. Analysis is of course categorized into two types: Technical and Fundamental. Most Forex traders use technical analysis and view the same charts, which leads to many traders around the globe trading in the same way and thereby causing a trend.
Fundamental analysis, however, should not by any means be ignored. Current events such as terrorist acts, war, big political or financial announcements can also take a big toll on the direction in which the market moves.
Rumors vs. Real Developments
As we said, the world's current events must not be ignored when trading Forex, as it can affect the market as much as anything else. Many traders have a news website open aside their trading platform, so they stay on top of world events. However, when paying attention to world events, it is very important to differentiate between real accurate news and fabricated rumors reported on the various media channels.
Many financial institutions will deliberately release a news report about a financial development, with the intention of making the market move up or down, depending on a current position. Before acting on a piece of news, verify that it is in fact real, then after you established that it is, check again!
Intervention and the Resulting Fear
As we have said, since the Forex market is so big, no one person or institution can have a real impact on the price of currencies. However, temporary fluctuations have been known to occur as a result of intervention by one institution or another.
Just to site an example, In 2002 the Bank of Japan watched the USD depreciate at a rate they believed was too rapid. They worried about the effect this would have on the competitiveness of Japanese exports to the US. The Japanese government decided to get involved and buy large sums of USDs, sometimes reaching numbers as high as 10 billion at a time. The market did not sit by quietly when one of these orders were placed. The USD would jump up to 150 pips within a few minutes. The Japanese government employed this tactic more than once and at different prices every time.
Now here is where it gets interesting. It was not the 10 billion USDs that made the market jump, what is 10 billion in a market of 4 trillion? What caused this fluctuation was the fear or emotional reaction that traders had to any talk of intervention on the part of the Japanese government.
The first piece of advice any Forex expert will tell you is, when trading Forex, leave all emotion out of the equation.
Follow the Leader Mentality
Many traders make the error of following a lead and assuming that if so many people are doing it, it must be the right move. What they do not realize is that those “so many people” had the same thought just moments before. Now this can work to your advantage if you get in in the beginning of such a trend, but if you join late, it might work against you. So if you see such a trend, check the news and the technicals to see what might have caused such a thing and decide whether you want in.
To summarize, there is really no room for emotion or personal feelings when it comes to trading Forex. Make sure that as a trader, you stay completely objective and scientific or else you might see some very heavy losses. Now, the big question is how to control your personal emotions and keep them out of the trading “room”? The answer is a trading technique. Make one for yourself and stick to it, no matter what.
Observe the movements of the market both from a fundamental and technical standpoint and if something does not seem right to you, don't trade, it's as simple as that. The market is not going anywhere any time soon, come back in an hour and decide on a trade then. When trading, never trade against the trend, always remember “the trend is your friend”. If you experience a loss, do not try to overcompensate in your next trade, stick to the plan. It is all about control when trading Forex.
Take control of yourself, your emotions, and your Forex positions.
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