In investment vocabulary, "herd mentality" refers to traders blindly following established investment trends or patterns. Such traders usually like to "trend the trend as a friend". In fact, clever use of this principle in the forex currency market can also bring unexpected returns to itself.
Why is "herd mentality" exploitable?
Obviously, currency market trading is largely driven by technical analysis, and the forex market is the most liquid financial market in the world. According to the latest data, the global average daily trading volume of the forex market has exceeded 5 trillion US dollars, and 6 mainstream currency pairs account for two-thirds of the total trading volume.
These currencies are closely watched by a large number of forex traders around the world, who monitor technical indicators around the clock for buy and sell signals. Once a key technical level gives way, other traders join in and consolidate the initial trend, exacerbating the herding effect. The guiding principle for exploiting the herd effect in the forex market is very simple - based on the opinion of the majority and the trend of the global market. A countertrend can make you very profitable in the market, if you are savvy enough.
The case for the herd effect at work
The depreciation of the yen in 2013 is a classic example of the herding effect at work. In April 2013, the Bank of Japan announced that it would buy government bonds and double Japan's monetary base by 2014. The Bank of Japan launched an unprecedented monetary stimulus to boost economic growth. As a result, the short JPY/long USD trade became one of the most popular trades in the first half of 2013.
The yen fell 12.4% against the dollar through the first week of May 2013. The yen broke the 100 mark as traders rushed to buy short positions in the yen, with herd mentality adding to the downward momentum.
The dollar's strength against most major currencies starting in May 2013 also reflects the herd mentality, with the greenback appreciating against 13 of the 16 most traded currencies. The unexpected strength of the dollar at the time was largely attributable to a rebound in the U.S. economy, attracting more capital inflows, creating a virtuous circle.
Source: fx cashback http://www.fxcashbackclub.com/
Why is "herd mentality" exploitable?
Obviously, currency market trading is largely driven by technical analysis, and the forex market is the most liquid financial market in the world. According to the latest data, the global average daily trading volume of the forex market has exceeded 5 trillion US dollars, and 6 mainstream currency pairs account for two-thirds of the total trading volume.
These currencies are closely watched by a large number of forex traders around the world, who monitor technical indicators around the clock for buy and sell signals. Once a key technical level gives way, other traders join in and consolidate the initial trend, exacerbating the herding effect. The guiding principle for exploiting the herd effect in the forex market is very simple - based on the opinion of the majority and the trend of the global market. A countertrend can make you very profitable in the market, if you are savvy enough.
The case for the herd effect at work
The depreciation of the yen in 2013 is a classic example of the herding effect at work. In April 2013, the Bank of Japan announced that it would buy government bonds and double Japan's monetary base by 2014. The Bank of Japan launched an unprecedented monetary stimulus to boost economic growth. As a result, the short JPY/long USD trade became one of the most popular trades in the first half of 2013.
The yen fell 12.4% against the dollar through the first week of May 2013. The yen broke the 100 mark as traders rushed to buy short positions in the yen, with herd mentality adding to the downward momentum.
The dollar's strength against most major currencies starting in May 2013 also reflects the herd mentality, with the greenback appreciating against 13 of the 16 most traded currencies. The unexpected strength of the dollar at the time was largely attributable to a rebound in the U.S. economy, attracting more capital inflows, creating a virtuous circle.
Source: fx cashback http://www.fxcashbackclub.com/
