Forex vs. Commodity Markets

How can any forex trading systems be effective with completely different instruments? The answer to this question is more simple than you would ever imagine.

We all learnt from the first part of this article that forex trading systems can be tuned in such a way that they will be capable of handling the expectations of the different types of instruments out there in the market. Although, this approach can only make sense to those traders who follow the principles of the technical trend analysis and may not make any sense for those traders who believe in the justification of the fundamental analysis. I consider myself a more-technical type of person and understand what this way of thinking suggests.

But how can any forex trading systems be effective with completely different instruments? The answer to this question is more simple than you would ever imagine. One common rule applies in the world of technical analysis which is the idea of the ‘self-fulfilling prophecy’, which is nothing else but pure psychology. That is right, a great deal of psychology lays behind the price movements so does behind commodity and forex trading strategies. The more traders await for a certain reaction from the markets to come then the more of them would like to be in that certain wave of price movement when it actually occurs. But while the masses of traders open their positions and get ready for the wave they will influence the prevailing price and shift it in towards the desired direction.

This latter idea derives from a basic concept of economics. If the majority of the traders assume that the price of any currency pair or stock or bond or commodity is lower than it should be then they see this case as a potential opportunity to make money. They believe that market will effectively price the underlying security so they start purchasing it as soon as they spot the price gap. This is one reason – but not the main reason – to have a forex trading system. Although, when the number of buyers increase compared to the number of sellers in the market – it happens when demand is greater the supply – then prices tend to rise to generate equilibrium between the two trading parties. It goes on until the buyers pull back and let the prices flow in the direction of weakest resistance. This example shows us that the market reacts to certain occurrences in pretty much the same way irrespectively what this instrument really is.

I will present you another example proving that good trading systems are completely interchangeable between a wide range of products in my next post.



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