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Market Psychology and its Impact on Traders

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trading in general and Forex trading in special are subject to fake moves that have no logic what so ever. This is the reason why so many traders are failing when trading the Forex market.

Everyone tries to understand every move in the market, but this is not how the market works. Or, to be more exact, this is not how the market moves.

Fake moves are the name of the game and it is normal if one thinks of all the factors that influence the Forex market: trading algorithms (robots, high-frequency trading, Forex brokers, commercial and central banks, global mergers and acquisitions, liquidity providers, retail traders, etc.). All these are factors that drive prices up and down in a trading day and one cannot understand them all.

There is a simple test to be made by all traders that consider technical analysis as part of their trades. Go on the bigger time frames, like the weekly and the monthly chart, and look when price moved back in time.

Can you put a fundamental news/event on every bullish or bearish candle? Can you say that the reason why the market moved was because the Fed hiked or cut rates, the ECB (European Central Bank) did this and that, or the NFP (Non-Farm Payrolls) came better that or below expectations?

The answer is that you cannot do that, and, more importantly, you should not do that. Market psychology is something that should be considered by anyone interested in the art of speculation and the starting point should be the fact that there is only one way to make it in this business: to be unique, think out of the box and be original.

Sounds too fancy and impossible? It is not. What traders need to understand is that trading is not a video game, it is real people with real money, it is a dog-eat-dog world, and no one has no bad feeling when he/she is on the right side of the market.

Understanding How Forex Market/Markets in General Works/Work

Like anything in the commercial area, trading is subject to the all-important supply and demand law. If there are more buyers than sellers (not in the actual number, but in the volume traded), the price will rise. If not, it will consolidate for a while and in the end, it will fall.

This is a powerful statement, especially when trading the Forex market. Sometimes (or most of the times) people are losing patience and because of that, they will lose their account, desire to trade, and passion for the trading game. This is a pity!

Trading should be viewed as an arena where the brightest and dumbest minds in the world are looking for the same thing: to make a profit. For some, it seems an easy thing to do, but an easy-made profit it is ALWAYS ending up in a bigger loss. Always, make no mistake about that.

To have a competitive edge in these markets, one must be able to use empathy before taking a trade. For the ones that don’t know what empathy is, it means to put yourself in the other people’s shoes. Or, in the case of trading, when you’re buying, or right before you’re buying, think for a bit how it will be if you would sell? Is it going to be different?

Before jumping to any conclusion and saying that this is a terrible thing to do because when you’re bullish you must buy, think of the fact that trading is the result of human action. Even if robots are dominating the trading arena for quite some years now, those robots are programmed by humans, so, in the end, it is a human or a person, like you and me, that is responsible for buying or selling at a specific place. No robots!

Contrarian Trading

If any of the above sounds too complicated or unrealistic for the trading world, do a simple test for your own sake.

Everyone has some kind of a money management system, something that a trader should obey no matter what. Either a small percentage to be traded on every trade, or a specific margin to be used for any given trade... stuff like that.

Imagine trading the other way around! That is, when you want to buy, sell, and when you want to sell, buy.

This is not a joke, and if you’re respecting the rules used when trading in a normal way, those rules should be respected when trading the other way around. Needless to say, you’ll have a hard time losing money!

The explanation for this is that markets are so complicated that only thinking differently and not like the crowd, will make you a successful trader.

One example comes from the Forex market this last Friday, March 3, 2017. Mrs. Yellen, the Federal Reserve of the United States Chairwoman, gave a speech late in the trading day after London closed and somewhere in the middle of the North American session.

The Fed is expecting to hike in a week and a half from now, and the market was looking for a confirmation from Mrs. Yellen. As a central banker, there are not many common words to be used when addressing the monetary policy.

However, what the lady said was, in a rough “translation”, that we will see a rate hike in March. Normally, such a statement will result in a dollar-buying frenzy.

To the surprise of many, not only that the dollar was not bought, but it was sold aggressively. The chart below shows the EURUSD pair being aggressively BOUGHT after a rate hike in the United States was basically confirmed!

Yellen rate hike

The main point of this article should be that trading is not a straight line and it is no one single recipe that makes traders win all the time. There is no holy grail what so ever. However, understanding how the market is moving, its driving factors and what can we do about that, will result in bigger chances to succeed.



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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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