But that there is a market there is first necessary to opposing positions, and that a price is formed at the point of coincidence of the buyer and seller. It is these competing narratives that define market trends. Since we all usually have access to the same information, which makes the difference is the position we take each other, so that if the majority interprets a particular economic indicator of positive, the trend is bullish, and vice versa. Therefore, the data point is not what creates the motion, but the interpretation of trading it self.
Some theories have attempted to bring order to the chaotic movement of the market, such as Dow theory and Elliott Wave.
The Dow Theory is the predecessor of the Elliot Wave. His contribution is recognized by the inference of two laws currently in force. These are:
First Law: The market uptrend is divided into three sections upward, starting first by a rebound followed by panic, and finally going to excessive weakness. The middle section is characterized by an atmosphere of growing optimism that the good news for the market to happen, until the last leg with an excess of optimism and euphoria.
Second Law: After a stretch upward, generating a change of direction in the market corrects at least 40% of the previous section.
According to the theory of Elliott Wave, market behavior follows rigid rules which, if applied, could provide a future projection. The behavior of the mass passes through stages of euphoria and panic, as well as sluggish market where swings are erratic. This theory postulates that the price movements act on the psychology of a large number of people who are influenced by various factors such as rumors, the market environment, the collective subconscious, and so on. This often generate irrational impulsive actions culminating peaks of euphoria or panic.
It should be noted that these theories, like many others, should be used complementarily with other tools and indicators to minimize errors. The study of market psychology can help us determine at what stage is this (optimism, euphoria, despair) to operate accordingly.
What are the factors that may influence market trends?
In fundamental analysis, an extensive list of factors can influence and change trends in the Forex currency market. These can be both economic, and political, geographic, and others.
For example, a change of government in a country can reinforce or undermine confidence affecting the currency that represents it. Certain measures taken by states or central banks directly affect or depreciating its currency to strengthen against other, leading to bullish or bearish trends according to the interpretation that the operators make a whole.
Forex traders regularly follow the evolution of certain indices and indicators (*), creating high expectations at times. These are the times when the market is generally quiet, and as soon as the data is published, starting the run as each operator expects to be among the first to enter the market to their advantage, since there are usually some consensus on the expected results. Certain indicators such as economic growth (GDP), employment levels and retail sales affect the willingness of investors as a whole so if you are positive, the national currency was revalued upward.
Also, in times of great instability and uncertainty, risk aversion increases so that investors tend to demand hard currency. However in times of greater stability are willing to risk in other currencies in favor of higher profits.
It is also important to pay attention to the behavior and policies of the "market makers", those who have access to large amounts of foreign exchange (financial coalitions, hedge banks, governments). They are market makers in the sense that they have the power to change the course of the latter at any time they feel that particular currency or economic status could be jeopardized.
Other factors to consider are the world trade, the rising price of commodites, the behavior of mutual funds, inflation, etc..
The forex market psychology may also be affected by potential events that have not yet been produced, usually driven by media hype, tendenciando market movements in a specific direction before anything happens. Finally, another factor contributing to the perceptions of traders are long-term trends where people invest based on the numbers showing highest value.
The forex market is now much more unpredictable and fluctuating than it was ten years ago. The more information, including daily analysis of trends and factors that influence them, will anticipate a greater chance for profit.
