The basis of technical analysis on the forex market is that trading behaviour will be repeated. By analysing and tracking this repetition one will be able to predict future market movements. Research has evidenced this to be a reliable method to identify behaviours as individuals (the traders) do have a tendency to react to similar situations (the trade) in similar ways. The closer one studies the market, the greater the chance of experiencing profitable trades through accurate prediction.
Measuring behaviour on the market
Behaviour is not measured using charts and tracking trends, but instead with indicators and oscillators. These strength and presence of these indicators are influenced by the trading, the market and the trader’s interactions. It is through this that we identify the psychological state of the foreign exchange Melbourne market.
Another way of measuring the Melbourne forex markets psychologically is through measuring the volume of either the number of ticks or number of shares traded at any given moment. Volume indicates the level of emotion displayed by the trader. Low volume shows indifference of traders, and high volume indicates a heightened emotional state. It must be remembered that this representation disregards the number of traders as it is a mean average of the noted behaviour.
Animal conditions in the forex market
As can be seen volume is a strong predictor of changing forex market psychology. If a significant reduction in trading volume can be seen during a mature trend in a bull market, this can indicate the bulls preparing to remove their profits as they feel the market is overbought. However, this could push the bears into action acting against the bulls. Suddenly, volumes will arise in the bear camp and this bull trend has now become a bear trend.
This can also be seen on the flip side of the coin. If we see a decrease in bear trading volume, the bulls may enter the market and drive the volumes up. The bears remove their profits as the bulls hold sway, making the bear trend a bull trend. This collective psychology is common in all trading industries.
Trading psychology on the foreign exchange Melbourne market
Trends can also contribute to the interpretation of the forex markets psychological state. A long-term trend will represent a low emotional state between traders, whereas short-term trends indicate moderate emotional states. This is due to the repetitive changes that a short-term trend shows which contributes to instability in psychological states. However, it should be noted that the effect of changing trends and formation of new trends differ from trader to trader.
While the more successful traders will remained unsettled by losses and alterations in their capital, there are those – particularly new traders – who will experience psychological discomfort based on influential losses. A series of losses in either small or long-term trends may develop into a larger problem, thus causing increased anxiety. By affecting one individual, this will indirectly affect more participants causing a sharp increase in volume indicating heightened group emotions by social contagion.