Often traders discuss the individual psychology of forex traders but what are the factors that determine a trend in the market? How does the collective effect the this market psychology as a whole?
In all markets there are buyers and sellers giving conflicting opinions and positions. These conflicting opinions about the state of the markets from the herd or the collective are what ultimately define trends.
Let us now discuss some of the factors that influence and define market trends.
When viewing the forex market in the eyes of fundamental analysis it is important to remember that a whole host of factors can turn trends and influence market direction. Any unforeseen event whether economic or political can shake the markets and cause trend changes in an instant.
For example, a change of government in a country can reinforce or undermine confidence affecting the currency it represents. Certain measures taken by states or central banks or directly strengthening or depreciating its currency against others, leading to bullish or bearish trends according to the interpretation of traders as a whole.
All traders are following the flow of price and the reflection of that through indicators so there on certain expectations on traders as a whole on what is going to happen. The thing is in an instance the trend can change as everyone will experience the same emotions. This creates the herd. Also be aware at news event releases or sudden unexpected news as it can change the trend in an instance.
In times of high instability investors in this uncertainty become more risk adverse and prefer hard currency or gold. People are willing and able to take on greater risk in favor of higher returns during times of stability.
It is also vital to focus on the market makers and the polices of the Central banks as you rarely want to be trading against these sides. Both market makers and Central banks and to a lesser extent financial coalitions and hedge funds have the power to turn the trend quickly and you do not want to be caught on the wrong side of this action.
Under normal circumstances the markets are normally drive by price action, media hype and both fundamental and technical levels in the market however there is always the chance that an unforeseen event like 9/11 or a country currency being devalued overnight as in Argentina or Russia. The collective positions and emotions are what move markets and the more you can understand the psychology of individual traders and groups as a whole the better your edge in the markets.
The forex market is now much more unpredictable and fluctuating than it was ten years ago. The more information you have, including the daily analysis of trends and factors that influence them will anticipate a greater chance for profit.