The Three Emotions that Move the Forex Market

by Andrew McGuinness     Jul 16, 2019

Forex trading offers a vast number of opportunities that are diverse both in their initial investment strategy and their potential for capital gain. Like investors in any sort of market, investors involved in Forex trading want to know what drives the market, what makes it move, and how they can best profit using their knowledge of different currencies and cultures. While those involved in stock trading can grab a quick glance of the corporation they're choosing to invest in at a moment's notice via government data and corporate reports, those investing in Forex trading have a bit of a larger challenge ahead of them. There are a seemingly endless number of factors that contribute to the value of a currency and its fluctuations because when you purchase into a specific nation's currency, you are banking on the potential and power of their citizens. You can tell a lot about a country's economic picture by grabbing a simple comparison graph or chart looking at the value over time of their currency when compared to the "big four" currencies that are considered most valuable in the world: the United States dollar, the British pound, the Euro used by the European Union, and the Japanese yen.

Because Forex trading involves investing in the potential of people, emotions also run especially high on the Forex market. While there is a huge amount of money moving into and out of the Forex trading system on a daily basis (to the tune of almost $2 trillion), the truth is that the emotions of traders and investors is largely what moves the market. The three emotions that control how the Forex trading system works are:

Greed. The green-eyed monster can cause even the most experienced on technical traders to ignore the signs that a currency will soon crash and attempt to jump on a growing hype. Greed usually causes a flush of currency value when a certain currency pair is doing particularly well. Unfortunately, it is also usually the cause of the crash and depreciation that soon follows. Many traders have lost it all after greed overcame their rational trading senses.

Fear. Fear of loss is what motivates many Forex traders to "jump ship" when things look rough. When a country goes to war, elects a different political party, or announces that one of their flagship corporations will be moving overseas, the result is usually a drop in currency value, as traders move their assets into a currency that will provide a more stable guarantee for their money.

Hope. If a currency is undervalued, why do any traders hold any of the lesser currency at all? The simple answer can be summed up in a single word: hope. Hope in the prosperity and adversity of a people can sometimes result in massive benefits. Take South Korea as an example; for decades, the country was considered to be third-world, poverty stricken by years of war with their neighbor to the north. During this time, the Korean won was basically worthless. However, in the 80's, South Korea underwent a massive overhaul, with high-tech corporations like Samsung and Hyundai shooting the country into the first world economic sphere. Those who held their faith in the Korean people and refused to sell their won during the low point of the Korean War became billionaires virtually overnight.

While many traders will tell you to separate your emotion from your trading as much as possible, it is nearly impossible to move all three of these common emotions out of the sphere of Forex trading. So, what moves the Forex market? In a word, psychology.

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