The Psychology of Trading

Have you ever heard from someone or read that markets are totally random? That those who are successful at trading happen to just be lucky? This is often the talk among those who have either not fully studied markets, or are only casual observers who haven’t traded themselves.

It is true that often the market will act in a random, irrational way. Sometimes it cannot be understood but it is more often the case that the price behavior can be explained. Remember that a market is simply a study of mass psychology: the price you see on a chart is the result of the actions of hundreds upon thousands of individuals and institutions.

To illustrate the point, we’ll bring up a few examples, the first being times of panic. If you observe not just the forex market but stock indices, metals, or commodities, prices have a tendency to drop much faster than they rise. It’s similar to a rollercoaster: it could take months for the value to rise yet only days for all the gains to be erased. This is a pattern one sees over and over again across all markets.

A second consideration is the psychological value of round numbers. Take a look at gold (XAU/USD) as it initially breached $1,000 an ounce. You’ll notice the price quickly rose once this level was held. This is something that one can witness with other markets, for example, when stock indices breach certain round levels, like when the Dow Jones broke 10,000.

Finally, popular technical indicators often help move prices as well. Many traders often feel that Fibonacci retracements are self-fulfilling prophecies, meaning that they are effective because everyone is using them.

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