Forex Market Psychology

6. Optimism and skepticism

Written by forex

Investment and trading decisions are always made in anticipation of future price movement. If we consider the process under a magnifying glass, we see that the investor or trader creates a hypothesis and then seeks it to fulfil its terms of trade.

The day trader can go through this process in seconds, in the expectation of an immediate result, while long-term investors will try to spend more time thinking about the hypothesis, pending a more longterm results.

In any case, in theformation of hypotheses about the expected future price movement, often plays the role of skepticism. For example, suppose that the investor initially puts forward the hypothesis that for the next 2-3 years, interest rates have to rise. In an attempt to be reasonable and objective, the investor might look for reasons why interest rates may rise. Skeptical he can focus on these causes, deciding to avoid investments that would have earned profit from the rise in interest rates. This type of thinking pattern common for intermediate traders, taught by bitter experience, when the market contradicts what they firmly believed. In extreme cases, some traders even stop fighting with your inability to form a hypothesis in which it would be possible firmly to believe, and therefore cannot make decisions.

When forming hypotheses of successful and experienced traders tend to be more optimistic, in accordance with his ratio of winning. They understand that the General hypothesis about economic data or market sentiment often ultimately turns out to be true, even though today they may find some details that contradict it. They are supported by knowledge of crowd psychology and price patterns in the markets reflect this mentality.

It should not take a position contrary to what you believe the masses, and to use the consequences of their faith.

It is very important to properly manage all forms of skepticism in the formation of hypotheses. Instead, develop an optimistic sense of what will happen in the future.

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