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Fear and hope – two emotions, making decisions in the market.

The basic precondition of the technical analysis is market prices are moved by fear and greed. These emotions influence trading decisions on what to buy or sell. When investors are afraid that the prices will fall, they sell. When they are afraid that it is possible to miss possibility to make profit, they buy without the sufficient basis on that. Greed, on the contrary, grows out of a combination of self-confidence and desire to reach profitable results during the shortest time. When traders feel that it is possible to make fast and easy profit, they buy.

But Doctor Hersh Shefrin, the visible researcher of the behavioral finance, proves that fear and greed doesn’t completely move the financial markets.

The fear really plays a role, but traders show greed less often, and more hope. When traders are frightened, they concentrate on adverse aspects of trade. For example, during losing transactions everyone thinks: “it is interesting, how can the price pass against me? Can become even worse?” Hope – polar contrast of fear. When traders feel hope, they concentrate on favorable aspects of trade. They think: “it is interesting, how much money could I make on this transaction?” They count on reception of money instead of continuously worrying about that, how much money they should lose.

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According to doctor Shefrin, people trade to reach the personal or financial purposes. When traders decide to make the transaction, they hope that it will help to reach their purposes. If the investment is successful, the hope turns to pride. However, if the investment appears unsuccessful, the hope turns to fear, and fear – in a regret. The aspiration to feel hope at an estimation of investment alternatives rather differs from the tendency to feel fear, but both tendencies exists in everyone. Doctor Lola Lopes, however, assumes that one tendency prevails over another. There are individual distinctions; some people aspire to be hoping optimists, whereas others – the frightened pessimists. Doctor Lopez believes that at the heart of these distinctions can be the requirement for safety. Some people do not consider the environment, as steady and safe. They believe that their environment can change any minute so they search for any signs of that can specify in changes which, in turn, can lead to instability and, probably, to chaos. These individuals believe that they cannot admit inconstancy of an environment so avoid it at any cost. It conducts them to searches of losses. They constantly are afraid that can lose money. On the contrary, the individuals believing that their environment is safe and steady not worry very much about potential changes or possible instability. They believe that can cope with any possible changes. It gives them freedom to concentrate exclusively on potential profit. They optimists also believe that will make much money. It is optimum to be in the middle of these two extreme measures. Yes, emotions obviously influence trading decisions. However remember, it is not only fear and greed, but also and hope.

Before you decide to make a forex investment or start forex trading yourself, better find a good forex book and read more about foreign currency trading market – this will save you from tons of troubles and traps.

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