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Forex Trading with Greed and Fear, Finding the Balance

Forex Trading with Greed and Fear, Finding the Balance
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The Dialectics of Decision Making

By : Kiren Somen
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In addition to considering the relative importance of actual news and rumors of news, each trader also considers the many internal factors related to the economy. Is there an abundance of land and raw materials? What are the human resources-that is, how well educated and well trained are the people? What is the nation's attitude toward trade-intervention policies? What is its attitude toward a strong or weak currency? (One country might want a strong currency to keep inflation down, while another might want a weak currency to build up exports.)

Political structures also play a role in the trader's decision making. Has one nation elected a conservative government-and, if so, how will that affect its economic system? Has another nation implemented reforms-and, if so, how will those reforms affect its economy and investors' perceptions of that economy?

Often, on balance, the nations and economies are only a background to the foreign-exchange market itself. In order to determine which way the currency is most likely to go, the forex trading trader must have a view on other traders' views of the currency. Are they bullish? Are they bearish? Since they're all hooked into Reuters screens, presumably they've all read the same figures and the same news announcements. But they may well interpret those bulletins differently.

Now the trader begins a process of taking the same information that's flowing worldwide and asking: Is there a contrary view that has validity? And, if so, do I (as a trader) have a strong enough conviction to take a position and risk losing some money on that view?

The trader's point of view bears no resemblance to the view of the directors of the central bank of the nation in which his chair, desk, screen, and phone happen to be located. A U.S. trader does not care whether he exchanges yen, deutsche marks, Swiss francs, or Australian dollars, as long as he ends up with profits. (I might add that most companies employing foreign exchange traders do not have a particular patriotic bias either.)

Of course, any U.S. trader would love to know whether his country's secretary of the Treasury and the Federal Reserve chairman are bullish or bearish on the dollar; but he wants to know only as a trader and an investor, not as a citizen who has a patriotic commitment to his currency.

Traders call one another constantly, sometimes to share their views, sometimes to air their apprehensions, sometimes just because they are confused.

Trader A calls Trader B. "What do you think?" he asks.

"Well," says Trader B, "right now the fundamentals are terrible and the technical look terrible. I mean, we all know the United States is in a recession, and everyone knows u.s. rates are going lower and overseas economies are booming. But does that mean everyone's already short dollars?"

"I don't know. Maybe."

"Well, if they're already short dollars, maybe we should be buying our shorts back. But we think that, overall, the buck is supposed to go lower. So I'm sitting here short dollars because I think no one else is short. But- even if they were short, I'd probably want to be short, except maybe it's going to bounce. So-what am I supposed to do? Should I take profits and sell dollars back out higher, or am I supposed to just stay short and assume it's going to bounce? Maybe it's okay if it bounces-because eventually it's going to go down."

There's a self-questioning dialectic that most traders entertain continuously. The dialectic turns fiercest when the question is whether to take profits. Losses are easy, because some price or loss limit will automatically trigger the liquidation of a position. Profits are tougher, because if I miss profit-taking opportunities by getting out too soon, or I wait too long and the profit turns to a loss, the psychological impact is greater. Traders become attached to their profits before they have actually been taken. And there's often an inner monologue about when to take profits. That one-sided conversation might go as follows:



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