Many people believe that short term news (in the case of daytraders) or a country's long term fundamental outlook (in the case of position traders) move currencies. The idea is that good news for a country will move their currency favourably and likewise bad news will move it the opposite way, however by and large the news figures themselves will not move a currency.
There are basically 2 fundamental reasons why a currency or stock moves in a certain direction and while both seem seperate, they are inextricably linked.
The first is emotion:
In their purest form, charts and technical indicators do not track the price of a given currency (or stock for that matter). I realise that this may seem like a bald faced lie to most reading this but allow me to explain:
Charts, in their most simplistic form, track EMOTION.
If ever you wanted to gauge how the majority of traders are feeling towards a certain country, look at a long term chart for that particular currency (or cross). It will be their emotional reaction (along with one other important factor) to a certain set of circumstances (news or information) that determines where price moves next.
Some news traders may notice that with certain news events that are supposed to move the market one way or the other are a non event and this is the reason why. The emotional reaction to the news itself was not large enough to make traders stop buying or selling therefore price fails to move in the way you think it was going to, given the news at hand.
Also the short term news event did not override the long term sentiment traders had towards that currency.
This brings us to the 2nd piece of the jigsaw puzzle.
Supply and Demand:
Trading is basically a war that takes place between 2 foes: The Sellers and the Buyers.
The Sellers want to get as much as they can for the currency and the Buyers want to pay as little as possible, however one must eventually give in to the others demands otherwise there would be no such thing as trading currencies (or any financial instrument for that matter!)
If a the Seller wins, price will move up and if the Buyer wins, price will move down. This is all purely based on the emotional tendences.
Supply and Demand will start a trend and emotion will move it then give it an extreme boost towards the end.
This is because when the trend starts to take shape, more Buyers or Sellers will enter the market driving price higher or lower.
Once the trend is undeniable to everyone involved, the people who aren't in the game want to get in and profit (emotional equivalent of greed). This causes an absolute frenzy of buying (uptrend) or selling (downtrend) causing price to rocket in the direction of the trend.
This is precisely the moment that the trend will often reverse because every man and his dog has money riding on the trend and there are no buyers (uptrend) or sellers (downtrend) left to push price higher or lower (has anyone ever spotted a trend and entered it right at the beginning of a correction or at the end of the trend only to have it reverse on them?
).
This sudden halt of buying or selling is called exhaustion and if you look back at your charts you will see it at the end of every trend. There will be a huge move one way or the other right at the end then the trend will be stopped in its tracks.
To those students of Elliott Wave theory, this is the reason why the third wave is always usually the largest - the trend has finally been spotted by everyone and every man and his dog is trying to get a piece of the action.
If you have an uptrend and it starts to drop, it's not because everyone has started selling, it's because everyone has STOPPED buying. There is simply no one with any capital to commit to the move left.
Price therefore needs to come down in order to enitice more buyers.
You will then have the opposite happen - price will start moving down of it's own accord slowly at first, then pick up steam when more bears enter the market, then rocket once the 'every man and his dog' (otherwise known as the dumb money) scenario starts to take shape.
If you can get your head around each of these concepts you will no longer be the unprofitable trader getting in at the end of the trend or in the middle of a correction. Instead you will be a profitable trader jumping in on the early movement of a new trend.
To summarise this whole piece, I will leave you with the words of the legendary trader W.D. Gann:
''If you will only study the weakness of human nature and see what fools these mortals be, you will find it easy to make profits by understanding the weakness of human nature and going against the public and doing the opposite of of what other people do. In other words, you buy near the bottom on knowledge and sell near the top on knowledge, while other people who just guess do the opposite. Time spent in the study of price, time and past market movements, will give you a rich reward''
Same with life really - go against what the ordinary folk are doing and more often than not you will be successful - afterall you are going against the grain just by trading forex!
Happy Trading
What really moves price.... -
10-28-2007, 06:38 AM
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