Psychology of Forex Trading

Psychology of Forex Trading

Psychology of Forex Trading

The fundamentals and techniques are undeniably essential in determining dynamics of foreign exchange. There are, however, two additional factors that are essential to understand about short-term movements in the market.This are the expectations and sentiment. They may be similar, but remain separate. Expectations are formed before the publication of economic statistics and financial data. Pay attention to the figures just published is not enough predict the future price of a currency.

If, for example, the U.S. GDP came out at 7% from 5% in the previous quarter, then the

dollar does not necessarily rise. If the market forecasts had expected a 8% growth, while 7% reading might come as a disappointment, thereby resulting in a very different reaction from the market.

Nevertheless, the forecasts have been replaced by market sentiment. It prevailing market attitude vis--vis an exchange rate which could be a result of the overall economic assessment towards the country, the general emphasis market or other exogenous factors. Take the example above on GDP USA, although the figure is 7% below forecasts, the market may not show reaction. A possible reason is that sentiment could be positive for

dollar regardless of actual and forecasted figures. This could be due to markets U.S. investments, or weak fundamentals in the cons-currency (euro Yen or sterling). A term that is generally associated with the "feeling" is "psychology". During the first two months of 2000, the euro suffered the fierce selling pressure against the dollar Despite steady improvements in fundamentals in the Eurozone.This is because that market psychology has definitely contributed capital to the U.S. due with continuous signs of non-inflationary growth, and due to the feeling that further increases in interest rates will work in the U.S. advantage

yield differentials from the USA, without derailing the economic expansion.

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