Foreign currency trading and market psychology : Foreign currency trading is affected by market psychology and trader perceptions in a variety of ways :
Flights to quality: Unsettling international events can lead to a "flight to quality," with
investors seeking a "safe haven". There will be a greater demand, thus a higher price, for
currencies perceived as stronger over their relatively weaker counterparts .
Long-term trends:
the markets of foreign currency trading often move in visible long-term
trends. Although currencies do not have an annual growing season like physical
commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term
price trends that may rise from economic or political trends.
" Buy the rumor, sell the fact:" This market truism can apply to many currency situations in
foreign currency trading. It is the tendency for the price of a currency to reflect the impact of
a particular action before it occurs and, when the anticipated event comes to pass, react in
exactly the opposite direction. This may also be referred to as a market being "oversold" or
"overbought".
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In foreign currency trading,
to buy the rumor or sell the fact can also be an example of the
cognitive bias known as anchoring, when investors focus too much on the relevance of
outside events to currency prices .
Foreign currency trading is affected by Economic numbers: While economic numbers can
certainly reflect economic policy, some reports and numbers take on a talisman-like effect:
the number itself becomes important to market psychology and may have an immediate
impact on short-term market moves.
"What to watch" can change over time. In recent years, for example, money supply,
employment, trade balance figures and inflation numbers have all taken turns in the
spotlight affecting foreign currency trading.
Technical trading considerations:
As in other markets, the accumulated price movements in
foreign currency trading in a currency pair such as EUR/USD can form apparent patterns that
traders may attempt to use. Many traders study price charts in order to identify such
patterns using them to forecast the movement of prices of currency pairs.
