Crowd behavior can help you a great deal in understanding technical analysis in Forex. Every investor has three basic emotions when trading: Greed for money money, fear to lose his profits and despair when he finds himself trapped in a wrong position. These emotions can be charted in any Forex chart and some researchers seem to believe that the Forex market cycles can be depicted by the correct appliance of the market sentiment.

Have you ever noticed an impulse wave in a Forex chart? An impulse wave is a wave that moves very fast, in an impulsive manner towards one direction. This wave charts the greed ingredient of Forex market investors: A lot of people realize that the new direction of the market can be very profitable and jump in and hold their position. Greed is never satisfied but when the move has gone too long, too far some investors begin to be overwhelmed by fear and liquify their positions to secure their profits. This is depicted in a Forex chart as a correction. Nevertheless when the correction makes its own way a lot of people see the new opportunity and jump in again. The previous trend resumes it’s way and so on. When people are overwhelmed by despair and fear to lose their hard earned money by some negative fundamental changes in economical environment they liquify their positions in the risky markets as Options or Forex and resolve to more safe investments as bonds or gold. This is the turning points of a market crash.

These changes in investors’ sentiment move the markets. The professional trader should have the discipline to use its own set of rules (his Forex system) and ignore the sentiments of greed and fear. Moreover he should have the instict to recognize the sentiment of the market that is to feel what the majority of other investors feel about the market. This is the most difficult task for an investor because this conception of the market can ofter be very blurred by his own emotions.

Behavioral finance studies these emotions and how they affect the market. Dow Theory includes some investor sentiment ideals to explain the market cycles. In my opinion the market sentiment is best explained with Elliot Wave Theory. This theory is a very complex theory but when mastered, the forecasting results can be extraordinary for the trader. Elliot Wave Theory, in a summary, supports the fact that due the emotions of the traders every market cycle is comprised by 5 impulse waves and 3 corrective waves. It is a very interesting theory with great forecasting potential but the trader needs to study and practice it a lot in order to master it.

There are a lot of books written by many authors about Elliot Wave Theory. The most of them present a very complicated theory with a very complicated manner. This has no practical value for a trader. During my research I found a book that helped me apply the Elliot Wave Theory practically. It is called “Applying the Elliot Wave Theory Profitably” by Steven W. Poser. The author presents Elliot Wave Theory with Forex oriented material and in a very practical way. Click here to see this book in Amazon.com

If you would like to see some real trading examples of my experience in Elliot Wave Theory you could watch the videos below. Thank you.

This entry was posted on Wednesday, March 21st, 2007 at 5:51 am and is filed under Trading Psychology. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.