Fundamentals + Investor Perception = Price
Now that simple! But consider its significance and understand that most traders don't, because they base their forex trading strategies on the following forex myths:
- Following the breaking news stories is a great way to make money
- Day trading limits risk and can be rewarding. - Forex prices can be predicted.
- Markets move to a scientific theory.
Believe any of the above and you will lose and lose quickly.
Let's take a look at the equation in more detail.
We all know the supply and demand situation affects the price but it's not the fundamentals that are important it is the way humans perceive them.
We all have the same facts to look at but we all decide what they mean in our own way, with the emotions of greed and fear controlling the bulk of traders.
Try and trade news stories and you are simply seeing a story nothing more and if traders got rich trading the news there would be a lot more traders who make money.
Day trading works of course it doesn't - the time span is to short how can you possibly predict what millions of traders will do in a few hours? - You can't.
Forex prices cant be predicted either, as that's just another word for hoping or guessing and you wont make any money doing that and this is linked to the fact there is no scientific theory of market movement. If there were, we would all know the price in advance and there would be no market.
What you really need to understand regarding the above equation is:
Forex trading is chaotic but you can win if you trade the odds.
It's a fact that traders throughout history push prices too far - this is trader psychology at work. Short term price spikes never last for long and their easy to see on a forex chart and their tradable for profit for savvy traders who can spot them.
Certain chart patterns reflect human psychology, if you can learn to spot them and trade them you can trade the odds and win.
You simply react to the reality of price change and go with the trends - no hoping or guessing just trading the reality of price.
If you use charts you can you see the fundamentals as well as the trader psychology.
All a forex chartist does is assume that all fundamentals are immediately reflected in price action and in today's world of instant communications that's truer than ever before - but forex charts give you something more.
You get to see how the participants perceive the fundamentals and its humans that determine the price.
If you have read this article and understood it you will see the common myths that most traders fall for and lose and a better way to win.
Think about the above equation and what we have said here and you will have a valuable piece of forex education which can set you on the road to learning forex trading the right way and help you enjoy long term currency trading success.
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