Wednesday, August 27, 2008

Market Psychology


Perhaps the most difficult to define (there are no balance sheets or income statements), market psychology influences the foreign exchange industry in a variety of ways:
Buy the rumor, sell the fact: This industry truism can apply to numerous currency situations. It is the tendency for the cost of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a marketplace being oversold or overbought.
Flights to quality: Unsettling international events can lead to a flight to quality with investors seeking a safe haven. There will be a greater demand, thus a higher cost, for currencies perceived as stronger over their relatively weaker counterparts.
Longterm trends: Very often, currency marketplaces move in long, pronounced trends. While currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longertrem cost trends that may rise form economic or political trends.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talismanlike effect the number itself becomes important to industry psychology and may have an immediate impact on shortterm market moves. What to watch can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

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