Forex Price Movement - Learn How This Important Factor Works or Lose

Forex Price Movement - Learn How This Important Factor Works or Lose

by kelly Price

Many forex traders think they need to study news stories and the fundamentals to win on the other hand, forex chartists think that charts move to some hocus pocus theory that predicts the future but the most important variable is much simpler and learn how to gauge it and you can enjoy currency trading success.

First lets look at the benefits and flaws of both forex techncial and fundamental analysis.

Let's start with a simple equation.

Fundamentals (Supply and demand) + Investor Perception = Price

Nice and simple that's the way any investment market moves and it's obvious that the most important variable is investor perception or sentiment.

The person who simply acts on news has no chance of winning, as it's discounted immediately and he is playing catch up. For evidence of this look at every major bull move and bear move and you will find that the fundamentals are almost always at their most bullish at an important market top and most bearish at an important market bottom.

The person who uses forex technical analysis will argue that as the fundamentals are immediately discounted in the price, so all you need to do is follow price action and this is by far the better way of trading - but it has one flaw.

You can't see how far a move will go as greed and fear take hold of investor's. Sure price spikes never last - but when are they going to end?

This is where you look at the fundamentals for clues to warn of technical tops i.e the sentiment.

You can do this by watching the news.

For example recently it was said the euro would gain on the dollar and make new highs because the US had cut interest rates - what happened?

The euro tried to get through an important resistance price and failed (we pointed this out in an article last week and the euro has plunged since) what was going on?

The news was discounted and bullish euro news didn't push it higher.

This meant the sentiment was at a bullish extreme and prices recoiled back.

If ever you see bullish news that doesn't push a market higher and bearish news that doesn't push a market lower, combined with a price spike on the charts, chances are you are going to get a move the other way.

There is a famous saying:

"If you can hold your head when all around you everyone is losing theirs you probably haven't heard the news"

In forex terms you have but you are drawing different conclusions - while the lemmings are blinded by greed and fear and never see a move ending, you are looking for a contrary trend.

If you look for price spikes and then look at the contrary view, then you can get some trading opportunities.

Are there any concrete indicators for judging investor sentiment?

Yes there are two great ones - % bullish and the Net Traders Positions report and we will look at these in the next article in this series.

If you want to maximize your profits and enjoy currency trading success you need to use market sentiment to anticipate forex price movement.