By Abe Cofnas, equity broker, futures trader and technical analysis instructor*

The book, The Psychology of the Foreign Exchange Market, by Thomas Oberlechner, provides the results of research on how professional traders view the markets. In Chapter 7, Professor Oberlechner focuses on how Forex markets are characterized by different metaphors.

Metaphors, of course, are an important way people organize information, as well as form their own expectations of the market. Professor Oberlechner cites the main metaphors used by Forex traders. Forex is like a:

Bazaar
Machine
Living beast

Or, Forex is like:

Gambling
Sports
War
The ocean

Many of us have probably used one or more of these concepts to characterize the Forex market. Such uses are not accidental. People need to organize complex phenomena and use metaphors as a tool for thinking about them.

The major point behind the research is that the mindset used to understand and observe the Forex markets is itself a factor in how one proceeds to trade. The person who views the Forex market as a sport will look to winning trades as the main focus but may become emotionally damaged when confronted with a losing trade.

In contrast, the person who views Forex as an ocean may tend to adopt longer-term views of market moves. Still others see the Forex market as a war and, as a result, may formulate trading strategies that capture PIPs as if they were the enemy.

Even if you do not read the book, it will be useful to ask yourself which metaphor applies to your own views of the Forex market and why.

Forex traders also bring to their trading different perspectives based on their job and life experiences. Each perspective provides different strengths, as well as weaknesses. Engineers who seek to learn Forex often have a tendency to try to model the market and project direction based on equations.

In contrast, doctors approach Forex trading with the medical mindset of diagnosing the price action. While the medical workplace provides an environment where patients have a great deal of respect for their doctors, the Forex market provides no such ego gratification. The market is not a patient who returns respect.

Those traders who come from a sports background, such as the martial arts, bring a disciplined mindset and the ability to control their emotions to the Forex market. Yet, emotions can provide valuable insight into managing a trade, and too much control of one’s emotions may be counter-productive.

It turns out, in fact, that Forex trading is a great equalizer among all professions, leaving most people challenged, as never before, in mastering profitable trading. However, if one profession would appear to provide important insight for Forex trading, it would be the field of music -- because Forex price movements have a kind of harmony and the Forex market a certain rhythm.

Webster Unabridged Dictionary of the English Language defines harmony as "a consistent, orderly or pleasing arrangement of parts; congruity". What is most interesting is that one doesn't need an in-depth knowledge of music to recognize when one is hearing a harmonic set of sounds or its opposite -- cacophony.

Experienced Forex traders focus less on applying more indicators as they become familiar with the inherent rhythm of the market. Yet, those new to Forex trading face the huge challenge of trying to dig through the noise in price movements and find an inner pattern or harmony.

The entire body of technical analysis has been evolving to provide tools that enable pattern analysis and the ability to smooth out the data. The person new to Forex trading seeks to master technical analysis and is challenged by the overwhelming number of indicators and information streaming all day.

What is important and what is permissible to ignore? How does the Forex trader know what to pay attention to? Part of the answer derives from looking at Forex price movements as a form of harmony. Let's explore this further.

In searching for trades, many traders have a favorite time interval. They might have a day chart, or a 1-hour chart, and, then, they apply a variety of analytical techniques and shape a trade. While this may be a rational set of procedures to evaluate the market, an effective technique to consider is to let the time interval choose you!

To clarify what we mean, consider the everyday experience of driving your car and trying to find a radio station you would like to listen to. Selecting the scan button allows you to listen for a few minutes to each station until the right tune comes along. The driver does not need to know in advance all the songs being played on every station. All that is necessary is to hear a song that is appealing.

Similarly, the Forex market is constantly streaming a variety of patterns. There are many potential trades. By scanning through the price action that is playing, you will spot a tradable pattern.

For example, you might see a sideways pattern (as shown in the chart below) in almost any time interval. You’ll notice that the pattern has a repetition of movement up and down the price scale, revealing an inner harmony. The engineer would recognize this pattern as a simple harmonic motion sinusoidal in time with a single resonant frequency. He or she might even be tempted to put forth an equation to project its path.

(Taken from hyperphysics.phy-astr.gsu.edu/)

Yet, a person versed in music would not need equations to sense the pattern as being clearly melodic with a repetition of the tones. Whether the source was the vibration of a string on a violin, or a result of the energy released by the clash of buyers or sellers trading a currency pair, it is an unmistakable non-random cycle of self-similarity. Traders with different backgrounds may all come ultimately to the same conclusion about the price action and its structure of movement.

Fibonacci Tones

In further understanding Forex prices and how they move, we cannot ignore the pervasive presence of Fibonacci ratios. It is certainly the case that professional traders know and use Fibonacci ratios to map market patterns. One of the milestones in becoming a more savvy Forex trader is developing your own understanding of how to recognize and use Fibonacci ratios to shape the trade.

Fibonacci is important because currency pairs often move between support and resistance in tune to a Fibonacci syncopation. After some experience, looking at almost any chart, one can often see retracement patterns along Fibonacci lines.

The subsequent chart shows such a sequence of upward and downward moves followed by retracements stopping at Fibonacci ratios. We can observe that, first, the pair made a move from a low to a high and then retraced to 38.2% on the way back down (pt 1) and started moving back up.

It, in fact, created a new high and then moved down to a low (pt 2). Having completed that low, it proceeded to move back up again, but stopped at 50% of the way up (pt 3). This is a sequence that, like music, provides an underlying theme to market moves.

The application of Fibonacci patterns as a universal phenomenon were further underscored when musicologists discovered them in the works of many composers, including Debussy, Bartok, and so forth. The next time you listen to the second half of Scott Joplin's "Maple Leaf Rag", you will notice the pattern of 13 stressed and 8 unstressed notes.

In fact, one can find Fibonacci patterns in the basic structure of instruments themselves. The piano, for example, has 13 notes that separate each octave, which has 8 white keys and 5 black keys. Forex traders will recognize the ratio of 13/8 as a Fibonacci ratio. When using moving average crossovers, try the 13 and 8 time intervals on the charts.

What does this mean to the Forex trader? By understanding that currency prices are not linear movements, but expressions of emotions and human behavior, Forex traders begin to move beyond a linear approach to trading. Expanding their perspective on the underlying tones of the market, they will likely see nested patterns that are recursive and, as a result, new trading opportunities.

Ultimately, as one trader notes, "Everyone's got the same information at the same time; therefore, you need to find a different way of finding an edge over your competitor." (The Psychology of the Foreign Exchange Market, page 203).

The ability to obtain the much-sought-after trading edge may very well depend on how one looks for it. It would be wise to look for patterns and "listen to the market". It may be playing a Fibonacci melody or, for a brief moment, another profitable tune.

* Reprinted (and modified) with permission from Online Trading Academy www.onlinetradingacademy.com