Crowd Psychology
Having been trading the dynamic currency markets for quite a while, I’m convinced that market action is indeed human nature in action. According to conventional thinking, the Forex market (and any market for that matter) is driven by significant events, whether economic or political. As such, we tend to anticipate a certain outcome in the market as a result of a certain event, only to realise that the outcome could be contrary to conventional logic. For example, the US economic stimulus package could be seen as good news for the US economy, and thus motivate some people to buy the USD. However, the USD could also decline as a result of the same news event. The thing about economic events is that they can be interpreted in different ways to explain opposing outcomes. The financial media often attributes opposing market moves to the same news event!! For example, on a certain day you may read something like “The USD strengthened due to Economic Event X”. The next day, when the USD weakens, you could read something like, “The USD weakened due to Economic Event X”.
So, is it the news events that drive the markets? I would say that it is the market’s response to the news events that drives the market. What difference does it make? A whole lot of difference!!! The market’s response to news events is very often irrational, and also very often happens before the actual event!! Many traders try to make sense of how a certain event will impact the market, after the event has occurred. This attempt is pretty much like shooting a moving target, because there are always 2 opposite ways the market will respond to the same event.
My trading style focuses primarily on identifying patterns in the ebb and flow of crowd psychology, which is truly the “engine” that drives the market, resulting in the trends (short-term and long-term) that we see on charts. Almost all the time, I realise that trading successfully relies a lot on going against the crowd psychology, which entails making decisions which are contrary to our natural human instincts. This, to me, is the greatest challenge all traders face, regardless of what kind of trading strategies they use.
