Market Psychology - All About Fear

What is Market Psychology?

The foreign currency exchange market, like every other market in the world, is influenced by human emotion. Market psychology has long been known about. It refers to the sudden or prolonged trading decisions that are mainly driven by emotional rather than analytical stimuli.

Bullish and bearish trading are two of the most commonly referenced market psychologies. A bull market is one in which optimism reigns: prices generally rise as traders believe in the underlying health of an economy or national currency. A bear market is one in which pessimism takes hold: prices tend to fall as traders come to believe an economy or national currency is losing strength.

Fear

Fear is commonly expressed by excessive caution or sudden selling decisions. It is typically engendered through a belief that a trading position is suddenly exposed to risk, potentially leading to significant losses.

Fear should be understood as a damaging emotion. It leads to a partial or total loss of self-control. If you have, for example, a well-developed trading strategy, fear can mean that you jettison this in the face of unexpected market events. The potential downside of trusting your instincts and acting on your emotions is that it leads to unnecessary losses. Furthermore, sticking to a trading strategy, ignoring your fear, can mean you exploit opportunities more effectively and for longer.

On the other hand, fear can be useful if controlled. A trading strategy can fail, however objectively it was developed. The key is to achieve the right balance between self-control and instinct.