Here’s what you are really seeing when you read a price chart…

Here’s what you are really seeing when you read a price chart…

When you look at a chart of a particular asset – whether it’s a stock, and index or a currency pair – do you ever consider that all you’re seeing is a picture of other people’s emotions?

Because that’s exactly what you’re seeing.

Price charts are just a measure of the emotions of other traders – otherwise known as ‘market sentiment’.

The two emotions on show?

Fear and Greed.

When the market is rising, the prevailing emotion in the market is greed…

Conversely, when the market is falling, the prevailing emotion is fear…

It really is that simple.

You can also attribute rising and falling markets to periods known as ‘risk on’ and ‘risk off’.

‘risk on’ period is when traders and investors are actively seeking higher yields on riskier assets – stocks, commodities, and commodity backed currencies (the AUD or CAD for example).

‘risk off’ period is when they’re actively seeking ‘safer’ places to keep their money – which could be government bonds, gold, the Yen and the Swiss Franc…

The reasoning behind why traders look to ‘safe haven’ currencies like the Yen and the Swiss Franc during ‘risk off’ periods is due to Japan and Switzerland being very geopolitically stable.

There’s not so much more to it than that.

Gold still has the psychological element to it being something physical that retains value well. So when people smell fear, they often turn to gold, or these ‘safe haven’ currencies.

Take a look at USDJPY during 2008 – as seen in the chart below:

Click image to enlarge.

They sold the dollar in exchange for yen, as you can see from the price fall.

We are currently seeing many natural disasters occurring, as recently as an 8.1 magnitude earthquake off the coast of Mexico just this morning.

Natural disasters create uncertainty…

This means that there is likely to be a fall in the price of USDJPY, USDCHF and an increase in the price of gold.

This provides us with a direction in the markets, which you could look to trade.