Trading Psychology

This advertisement reminded me of an entertaining story I read before about how strongly psychology can affect a market. It is from the book The New Gatsbys.

It takes place at the Chicago Board of Trade. Soybeans were sharply higher. There was a drought in the Illinois Soybean Belt. And unless it ended soon, there would be a severe shortage of beans. . . .

Suddenly a few drops of water slid down a window. "Look," someone shouted, "rain!". More than 500 pairs of eyes shifted to the big windows. . . . Then came a steady trickle which turned into a steady downpour. It was raining in downtown Chicago. 

Sell. Buy. Buy. Sell. The shouts cascaded from the traders' lips with a roar that matched the thunder outside. And the price of soybeans began to slowly move down. Then the price of soybeans broke like some tropic fever.

It was pouring in Chicago all right, but no one grows soybeans in Chicago. In the heart of the Soybean Belt, some 300 miles south of Chicago the sky was blue, sunny and very dry. But even if it wasn't raining on the soybean fields it was in the heads of the traders, and that is all that counts. To the market nothing matters unless the market reacts to it. The game is played with the mind and the emotions.

In order to drive home the point about the importance of mass psychology, think about what happens when you exchange a piece of paper called "money" for some item like food or clothing? Why is that paper, with no intrinsic value, exchanged for something tangible? It is because of a shared psychology. Everyone believes it will be accepted, so it is. Once this shared psychology evaporates, when people stop believing in money, it becomes worthless.

So do you really believe Forex can let you earn 405% of the return? Unless you really are a genius in reading the minds of the human and astute in your judgment...