Let’s first talk about the first concept here, the concept that a lot of volume in the forex market is not speculative. Remember, pretty much everybody buys a specific stock, because they want to sell it when it goes up, and make a profit, based on that transaction. Because of that, there is a human psychological pattern of speculative buying and speculative selling, and since human mind is relatively systematic, it makes some sense to have a technical trading system, based on some behavioral patterns, in order to trade the stock market, but what about forex? Let’s say you are a multi-national corporation, such as BMW, and you keep most of your money in Euros, but you must make a payroll to some employees in the United States, and you don’t have enough dollars for that. Let’s say you need to transfer 1 billion Euros into Dollars, so you hire Credit Suisse to do it. Since forex market is moved by supply and demand, do you think the price of EUR/USD may get affected as 1 billion Euros is being sold, and 1 billion dollars being bought? Of course it would, not on a large scale, but on an intraday scale. Do you think Credit Suisse is going to care much about technical levels when selling those Euros and buying US dollars? I don’t think so…
Or let’s say you are a big firm in Holland, and you manufacture cheese. You own a bunch of cows, equipment, you have employees in Holland, and you have to pay all your expenses in Euros. Let’s say, you sell 50% of your cheese to other Euro Zone countries, and you sell the other 50% of your cheese to the United States. So you pay your expenses in Euros, and you take 50% of your revenues in U.S. dollars, which you later have to exchange into Euros again. Let’s say over one year period, the U.S. dollar decreased 20% against the Euro, so in comparison, because you had to pay your expenses in Euros, and sell half of your cheese in dollars, and you couldn’t raise the price, because you wanted to stay competitive with the U.S. cheese manufacturers, but you just lost 10% of your profits, because of that exchange rate… So next year, you get smarter, you decide to hedge against a possible decrease of the US dollar, so you hedge by buying EUR/USD. Do you really care much about whether EUR/USD is going to go up or down? No, you don’t. You simply protect your business, in case the dollar plummets further, you will make money on your exchange, and that way will protect your business from losing a lot, in case the exchange rate of Euro versus Dollar goes up.
Or how about a large corporation in the United States, buying another large corporation in Europe? They are going to have to sell their U.S. dollars, in order to buy Euros, so that they could buy that corporation. Do you think that will affect the price of the EUR/USD intraday? Sure it will, because it moves by supply and demand. But how are you going to predict such activities via a pattern of technical analysis, while the currencies are being sold sporadically, with almost no speculative interest? All of a sudden a large chunk of technical analysis that’s used in the stock market, stops making sense, if you think about it deep enough. So if somebody is trying to buy or sell currencies, based on chart patterns such as head and shoulders, they are basically doomed, because such trading method has no more logical merit, like it used to have in the stock market. So the person, can study for years these patterns, and spend tens of thousands of hours trading, and he’ll probably never get anywhere, he won’t have a reliable forex trading system, the only thing that will keep his hope is the wonderful 50/50 probability that exists in any market, which gets to more like 48/52, with the brokers' spread and commission. So that person might as well go to Las Vegas and use his chart patterns to play blackjack. At least he’ll get free room and food if he gambles enough.
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