Many trader make the mistake of thinking Forex prices move to the fundamentals and try and trade the news and lose and others think that prices move to some scientific theory and lose - but the real key to spotting big changes in Forex trends is enclosed.
Markets collapse, when the news most bullish and rally when the news is most bearish, so its pretty obvious, trading the news is doomed to failure. Others traders believe all the rubbish they read, that prices can be predicted in advance on charts and that they move to some higher, scientific theory and they lose too.
So, lets look at how to judge where Forex prices may go and let's start with a very simple equation:
News ( Supply and Demand Facts) + Investor Perception of = Price
From the above, its pretty obvious that the news is not important, its what investors make of it that is. All these millions of traders, added together make a price. You may say, as human nature is constant, Forex prices must be able to predicted in advance but you would be wrong. Why?
Because you can never fully predict what all these humans will do, at any one time with absolute certainty. Humans are creatures of emotion and by definition, do NOT conform to a scientific theory.
Trading currencies is an odds game nothing more but that doesn't mean you can't make a lot of money - you can. Let's look at this in more detail.
The key to price movement is trader sentiment. As long as sentiment remains bullish, prices will rise which is pretty obvious but you need to decide when sentiment is going to change - so how do you judge sentiment changes?
You can see sentiment on a price chart and if you look closely, all short term price spikes are temporary. Greed and fear drive prices to far up or down and then, prices return to more realistic value. Supply and demand facts move prices long term but in the short term, the crowd and emotions rule and they push prices to far up or to far down.
If you trade into price spikes and trade in the opposite direction to the crowd, you can make a lot of money. A good way to do this is to watch for a strong trend and bullish news fail to push it higher. In this instance, greed has probably reached its peak and you can look for a sell signals on the charts.
There are two great sentiment reports you can use - the CFTC Net Traders Position Report and Market Vanes % Bullish which can warn you when sentiment is to bullish or bearish, giving you advance warning of a trend change. We will look at these great tools and how to use them, in our next article on spotting trend changes and show you how they can add an extra edge to your trading.
If you understand market sentiment and how to use it, you are truly on the road to Forex trading success.
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