How psychological factors affect forex market
THE Forex market is so big in contrast to other global markets that a single individual cannot influence or have any serious effect on the rise or decline of any currency. There are many factors that influence a currency’s value, ranging from economic factors, political factors, and even a country’s status in the world community. Although no single trader can influence the market, there are many aspects of the Forex market that can have an influence on a trader’s decisions.
One of the primary means by which traders decide what and how to trade is Forex analysis, which is of the utmost importance when deciding which position to open or close. Of course, this analysis is categorized into two types: technical and fundamental. Most Forex traders use technical analysis, which often leads to trading communities around the globe following similar trends when they trade on the same underlying assets.
It is also important not to ignore fundamental analysis, which considers the bigger picture in the market. Events such as big market shifts, natural disasters, terrorism, political or financial statements or war can have a big influence on the market’s directions. This news and economic events are what fundamental investors mostly focus on when deciding their trades.
A classic example are the events of 15 January 2015, when the Swiss National Bank (SNB) shocked the world with the announcement that it would remove the minimum exchange rate cap of 1.20 CHF to the Euro. The markets had become accustomed to the stable rate which was put in place three years ago, and as such many were taken completely by surprise. Panic set in and there was a mass Euro sell-off causing Europe’s common currencyto drop dramatically against the Swiss Franc and other rivals. The huge moves in the market meant that a lot of people lost a considerable amount of money.
International current events must not be ignored when trading Forex, as they can significantly affect the market. Many traders ensure that they are constantly updated with the latest economic news by having a news website open next to their trading platform. Nevertheless, it is essential to know what constitutes authentic, accurate news, and what is speculation or manipulated news reported on various media channels.
In trading psychology, keeping a cool head and verifying the facts can save a trader time and money. Some traders get carried away by a sudden trend, assuming that if so many people are doing it, it must be the right move. What they do not realize is that those other people had the same thought just moments before they did. This can work to your advantage if you get in at the beginning of the trend, but if you join in late, look out for a reversal which could work against you. Before joining the trend, check the news and your technical analysis and then decide whether or not you want to take the trade.
Beyond checking your information and being sure of a trade before you make it, it’s also important to point out that there is no room for emotion or personal feelings when it comes to trading Forex. Make sure that as a trader, you stay as objective as possible, and keep a scientific approach, or else you might see heavy losses. Now, the big question is how do you control your personal emotions and keep them out of the trading room? The answer is to find a trading strategy that works for you. Research, make a strategy you are comfortable with and stick to it, no matter what.
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. It is all about self-control when trading forex; the best way to succeed in Forex trading is to take control of your strategy, your emotions, and your forex positions.
Akinyele works with ForexTime Nigeria