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Trade Forex On Herd Instinct
The herd instinct refers to the tendency to follow an established trend.
Six currency pairs account for two-thirds of all forex trading volume. Currency traders closely monitor each and use technical analysis to spot buy and sell signals. Once a key technical sign appears, other traders jump in and reinforce the trend.
You can use the herd instinct to your advantage by trading on the majority view and established trends in global markets.
Currency action over recent years has revealed a few common herd instinct trades.
When the Chinese economy is growing strongly, consider going long on the Canadian and Australian dollar versus the greenback.
When global growth slows, short the Canadian and Australian dollars and go long on the U.S. dollar and Swiss Franc.
Remember that the yen is volatile. Plan your exit even before determining your entry into a yen-based currency carry trade.
Inexperienced forex traders should consider a few additional tips:
- Stale or long-lived trends can reverse quickly and sharply.
- Plot your exit strategy in advance.
- Use stop losses to maintain trading discipline.
- Remember that being long on one currency means you’re short another. Avoid complacency that turns a profitable position into a losing one.
- Try not to add to a losing position.