The trillion-dollar forex market pools millions of people daily. Depending on how the traders react to price action and fundamental developments, it determines a great deal of how currency pairs oscillate. Likewise, there are self-fulfilling prophecies that influence traders’ trading decisions in the market.
For instance, whenever there is fear in the market, it is common to find traders scampering for safety in safe-havens such as gold and the U.S dollar to believe they will outperform the overall market. Similarly, whenever there is tranquility, risk appetite surges, and traders tend to bet on risky currencies such as the British Pound and the Euro.
What is Self-Fulfilling Prophecy in Forex?
Simply put, self-fulfilling prophecies in forex are events caused by preceding predictions or expectations of things going to happen that end up happening. Self-fulfilling prophecies in the forex market, often mark the beginning of a new concept that causes traders to behave differently.
When it comes to price analysis in the forex market, traders make lots of assumptions when it comes to future price movement. Technical analysis is at the heart of the most self-fulfilling prophecies whereby traders make lots of assumptions.
The vast majority of traders that carry out technical analysis base their trading decisions on how price movements behave along channels, support, resistance levels, and moving averages, among other indicators.
For instance, whenever price bounces off a support level on huge volume, it is often expected that price will rally, a self-fulfilling prophecy that most of the time comes true. Similarly, whenever price fails to go through a given resistance level, it is often expected that price will retreat from a given higher and start to edge lower as one of the self-fulfilling forex prophecies.
Therefore, technical analysis is at the heart of most self-fulfilling prophecies that occur in the forex market. Most people insist on the technical analysis being a self-fulfilling prophecy given that a large number of traders behave a certain way when using indicators.
Given that traders behave a certain way and make trading decisions the same way, currency pairs often move in a given direction either up or down, conversely ensuring traders’ predictions come to fruition.
Technical Analysis: A Self-Fulfilling Prophecy in Forex
Common signals generated by technical analysis are often self-fulfilling seen as one reason why prices tend to move in a given direction in the forex market. For instance, traders anticipate price to continue edging higher after finding support above the 200-day moving average.
Similarly, whenever price breaks the 200-day moving average from above, it is often expected to continue edging lower on traders interpreting the same as the start of a bearish trend.
Besides, Fibonacci retracements are often said to be self-fulfilling in the forex market, given that most people base their trading decisions on them. For instance, if the 1st retracement in the indicator suggests that everyone should go short and everyone shorts, the likelihood of price falling is a self-fulfilling prophecy that often happens.
However, given that participating traders’ goals are usually different, there is always a likelihood or difficulty of technical analysis bearing the expected results based on how technical indicators respond to price changes.
For instance, consider traders were placing a stop-loss order below the 200-day moving average of an underlying asset. If a majority of traders have done so, then the underlying price will ultimately move lower.
Once other traders see price moving lower, they are likely to enter sell positions, conversely fuelling a sell-off reinforcing an emerging downtrend. The short term selling pressure is considered self-fulfilling as new traders enter the market in anticipation of prices edging lower.
However, it is essential to note that it will have little bearing on where the price will be weeks or months after the move. The fact that traders already opened positions can no longer push price lower increases the chances of price reversing after an extended period.
Benefits of Self Fulfilling Prophecy in Forex
Technical analysis is a self-fulfilling prophecy in the forex market that has been proved to be highly effective. The use of support and resistance and trend lines has helped technical traders make informative decisions when it comes to price determination.
The predictive qualities of indicators allow traders to stick to rule-based strategies when it comes to investing in the currency markets. In most cases, traders base their prediction of where the markets are likely to move based on technical indicators interpretation and not emotions.
The fact that most technical indicators have been proved to be highly effective in price determination, more so in technical analysis, has allowed traders to generate a fortune in the markets while relying on self-fulfilling prophecies.
Drawbacks of self-Fulfilling prophecy in The Forex Markets
Proponents of technical analysis as a self-fulfilling prophecy insist that technical indicators are always right because many people base their trading decisions on them. In situations where large numbers of people don’t base their trading decisions on indicators those who use them can fail to achieve the desired results despite signs pointing to the same
While standard signals generated by technical analysis can be self-fulfilling, that is not always the case most of the time. At times, prices in the forex market end up moving the opposite direction to what indicators point to.
A self-fulfilling prophecy is one in which a prediction in the forex market often becomes a reality. It usually occurs in technical analysis whereby technical analysts rely on forex indicators to study and try to predict future prices that often pan out true.