Transcript The Psychology of Forex Market Trading

Business in New Economy Scientific Circle
David Adamczyk
Introduction to the psychology
of the stock market.
Psychology is a very important part of
trading, you just can’t do without it. I’ll show
you some very interesting trends and facts
linked with psychology, human nature and
economy.
Trading Forex is certainly not easy, otherwise everybody
would be a millionaire. In fact, 90% of Forex traders are
actually making losses.
Forex market is too complex and there are too many factors
that are giving huge impact to the daily fluctuation. The
pure technical analysis or the fundamental analysis can
never forecast the Forex market trend accurately.
Invest more time to really understand how Forex market
work, especially study the trend behaviour characteristic in
specific time frame before committing with your hard earn
money.
Irrational trends in trading
The Monday effect
A theory that states that returns on the stock
market on Mondays will follow the prevailing trend
from the previous Friday. Therefore, if the market was
up on Friday, it should continue through the weekend
and, come Monday, resume its rise.
The Weekend Effect
A phenomenon in financial markets in which stock
returns on Mondays are often significantly lower than
those of the immediately preceding Friday. Some
theories that explain the effect attribute the
tendency for companies to release bad news on Friday
after the markets close to depressed stock prices on
Monday. Others state that the weekend effect might be
linked to short selling, which would affect stocks with
high short interest positions. Alternatively, the effect
could simply be a result of traders' fading optimism
between Friday and Monday.
Santa Claus Rally
A surge in the price of stocks that often occurs in the
week between Christmas and New Year's Day. There
are numerous explanations for the Santa Claus
Rally phenomenon, including tax considerations,
happiness around Wall Street, people investing their
Christmas bonuses and the fact that the pessimists are
usually on vacation this week.
January Effect
A general increase in stock prices during the month of
January. This rally is generally attributed to an increase
in buying, which follows the drop in price that
typically happens in December when investors,
seeking to create tax losses to offset capital gains,
prompt a sell-off.
Closer look
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!
12
2
The trend is holding
- I’ll buy at the next
consolidation
3
Good thing I
didn’t wait!
Drat! I’ll buy in again. It’s
cheaper than last time
anyhow
4
I’ll use this correction
increase my position . . .
5
Ouch. As soon as it
goes back up, I’m
selling out!
1
Ah, the price is
going up, let’s
watch the market
9
6
It’s going to
tank again anyway
OK, let’s wait for it to recoverotherwise this will have to be a
really looooong-term investment
7
Enough! I’m selling out!
And staying out
8
Good thing I sold
everything!
11
This is it! I knew this
was going to happen
all along!
10
What the hell???
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.
Summary
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.
Hints
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.