Sometimes we trade the news and sometimes we trade technical factors. Sometimes you can make more money trading by anticipating the trades of other traders. If you know when the bulk of traders will buy or sell you can place orders to buy and sell just “inside” of theirs and win each time. Right? Maybe.
What drives the Forex market? Yes, over the long term it is fundamentals. When a country prospers and its interest rates go up and its exports go up, etc. so does its currency in the Forex market. However, along the way Forex trading causes buys and sells based upon shorter term expectations and the Forex market reacts. This is where technical trading in the Forex market comes in.
Here are a couple of thoughts about technical Forex trading, Forex market psychology, and the like. How does Forex trading software project support and resistance levels? When your Forex trading software suggests that you buy or sell one currency versus the other it has done some very fast calculations, often based upon Fibonacci numbers, retracement levels.
This article will not pretend to explain the mathematics off all Forex trading software. The point is that similar types of mathematics are used in all Forex programs.
So, let’s say that the dollar is in a nosedive after a particularly bad session of Mr. Bernanke before congress. In this scenario everyone knows that the dollar will weaken over the next few months. But, how fast and how much are the questions. So, everyone places their bets differently, right? I mean we are all individuals and cannot all agree, right?
Wrong. If we all use variations of the same Forex trading software and get the same calculations using the same assumptions then we can all come to the same conclusions at the same time or, at least, our Forex trading software can!
What often appears to be market psychology is lots of traders following their software like sheep. Now, who cares, if it makes money? Right? Well, you could make more. And, if you are losing money, then what?
When everyone is trading based upon the same general computer calculations there is a matter of predictions that fulfill themselves.
Whenever purely technical Forex trading gets you in trouble it is good advice to take a fresh look at the fundamentals. However, sometimes it is the technical trading that gets you into trouble if you are the last one to click the button when everyone else is getting in or out of a trade. At that time you need to look at your Forex trading software or maybe look at being satisfied with a little less profit or a little less risk. Maybe selling just before the recommended resistance level will work.
If we all had unlimited capital then we would not worry about a short term glitch so long as our trade is in the direction that fundamentals tell us the Forex market will move. We do not all have unlimited assets but it is possible to keep ones trades within a reasonable fraction of available capital. Then there is room for correction and there is room to wait for fundamentals to assert themselves despite a herd of computers moving in lockstep moving the market back and forth.