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 affect this market psychology as a whole?
In all markets, there are buyers and sellers who give conflicting opinions and positions. These contradictory opinions about the condition of the markets of the herd or collective are what ultimately define trends.
Now let’s discuss some of the factors that influence and define market trends.
When looking at the forex market in the eyes of basic 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.
Eg. Can a government shift in a country strengthen or undermine confidence affecting the currency it represents. Certain measures taken by states or central banks or direct strengthening or depreciation of its currency against others, leading to bullish or bearish trends according to the interpretation of traders as a whole.
All traders follow the price flow and the reflection of it through indicators, so there are certain expectations of traders as a whole about what will happen. The case is, in one case, the tendency may change as everyone will experience the same feelings. This creates the herd. Also, be aware of news events or sudden unexpected news as it may change the trend in one case.
In times of great instability, investors in this uncertainty become more risk averse and prefer hard currency or gold. People are willing and able to take on a greater risk in favor of higher returns in times of stability.
It is also important to focus on market makers and central bank policies as you rarely want to take action against these sites. Both market makers and central banks and, to a lesser extent, financial coalitions and hedge funds, have the power to reverse the trend quickly and you do not want to get caught on the wrong side of this action.
Under normal circumstances, markets are usually driven by price action, media hype and both basic and technical levels in the market, but there is always a chance that an unforeseen event like 9/11 or a country's currency will be devalued overnight like in Argentina or Russia. The collective positions and feelings are what moves the markets, and the more you can understand the psychology of the individual traders and groups as a whole, the better your advantage in the markets.
The Forex market is now much more unpredictable and volatile than it was ten years ago. The more information you have, including the daily analysis of trends and factors affecting them, foresees a greater chance of profit.