To better understand how psychology affects the market as a whole, think of it in terms of the way you yourself feel when you're trading. When a currency you've bought low starts to rise, you're elated-- and probably feeling a little greedy. When it begins to fall, you get scared, even panicky. And so do a huge majority of traders out there, especially those that trade on a day to day basis. And how they react to the rise and fall of the market --that every-slippery market psychology-- is one of the most important factors in determining currency prices.

The Technical Aspects of Forex Psychology

Of course, when something as complicated and intangible as human psychology begins to have an effect on so many wallets, somebody out there is going to find a way to quantify it. So there are technical ways to look at Forex market psychology that help traders to use it to their advantage. Here's a simple way to look at it:

Currency and economy fundamentals + Perception and psychology = Price

Along with fundamentals, fear and greed are the prevailing forces behind the movement of the Forex market-- the actual state or situation of a country or currency isn't as important as the way that situation is perceived by the oceans of people out there trading. Traders --that is, you and me-- are the ones who determine price. We do this in a few specific ways:

Flight to quality. Any international event that upsets a currency can cause traders to opt for a safer, stronger currency, causing strong currencies to rise over unstable ones.

Pushing prices. Since Forex traders act as a group, it often happens that traders push the prices of a particular currency too high or too low. When traders begin to see that prices have been pushed too far, there's a sudden panic to get out (or get in).

Rumor and fact. When a large action or event is announced or expected internationally, the Forex market is often overly affected before that event ever takes place. When the expected event comes to pass, traders soon realize that the market is oversold or overbought. This bit of market psychology can cause a sharp rise and fall in the Forex market before stabling.