Page 38 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

When a trade is making money, the market is telling them they are right and to let the position
ride. Winners don't add to, or "average", losing positions. They dump the trade and go looking
for a new opportunity. Successful investors may add to the winning trades. When ahead, they
press their advantage while remembering that at any time the market can turn on them and
prove them wrong.

THE PSYCHOLOGY OF COMMODITY PRICE MOVEMENT

The price of a futures contract is the result of a decision on the part of both a buyer and a seller.
The buyer believes prices will go higher; the seller feels prices will decline. These decisions are
represented by a trade at an exact price.

Once the buyer and seller make their trade, their influence in the market is spent — except for
the opposite reaction they will ultimately have when they close the trade. Thus, there are two
aspects to every trade:
1) Each trade must ultimately have an opposite reaction on the market, and
2) The trade will influence other traders.

Each trader's reaction to price movements can be generalized into the reactions of three basic
groups of traders who are always present in the market:
1) Traders who have long positions;
2) Those who hold short positions; and
3) Those who have not taken a position but soon will.

Traders in the third group have mixed views on the market's probable direction. Some are bullish
while others are bearish, but a lack of positive conviction has kept them out of the market.
Therefore, they also have no vested interest in the market's direction.

The impact of human nature on futures prices can perhaps best be seen by examining changing
market psychology as a typical market moves through a complete cycle from price low to price
low.

CLASSIC PRCE PATTERN

Assume prices trade within a relatively narrow trading range (between points A and B on the
chart). Recognizing the sideways price movement, the "longs" might buy additional contracts if
the price advances above the recent trading range. They may even enter stop orders to buy at B,
to add to their position if they should get some confirmation the trend is higher. But by the same
token, recognizing prices might decline below the recent trading range and move lower, they
might also enter stop loss orders below the market at A to limit their loss.

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