Forex Supply and Demand: Perception vs. Reality - ForeXposed

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Thursday, March 16, 2017

Forex Supply and Demand: Perception vs. Reality

Last night I received a lot of questions, either through email or chat about perception and forex market sentiment. Generally, question is about the significance of perception against daily trading activity. I try to describe here with images to better understand the importance of collective perception of buyer and seller which result in price movements.

I'll show you a “divergence”. Not divergence on some kind of indicators like MACD, RSI, CCI, etc., but the divergence between the fundamentals that move the markets and the lately action of entire stock of dollars, technically.
Forex Supply and Demand: Perception vs. Reality

Forex Supply and Demand: Perception vs. Reality

Forex Supply and Demand: Perception vs. Reality

The above data is a factor and indicator of USA fundamental, which become parameters for The Fed to take policies to raise or lower interest rates. From the data, we can conclude the US economy fundamentally not showed significant changes, thus many economic indicators worsen. This would make probability for The Fed to raise interest rates in the near future is small. It means maintaining a weak dollar policy is still the first option (although Government talk about the need for strengthen US dollar).
Forex Supply and Demand: Perception vs. Reality

But the market instead saying another. On the chart above, shows the rising motion of dollar index (DXY) which is pretty sharp the last couple of weeks. What does this all mean? Whether market participants ignored the fundamental of dollar? Whether the U.S. economy is better than Europe?
The answer lies in the COLLECTIVE PERCEPTION. We know the market is the place where the discount mechanism running efficiently.
All information is ‘Known’ and ‘Knowable’ have been discounted or reflected on the price. The prices that currently moving, tick by tick, is a perception of price to fundamental factor which do not / not yet known (Unknown). So the market makers know the America fundamental condition, but the ignorance/not yet know how to solving the problem on Greece/Spain crisis, creating FEAR on market participants and encouraged the massive Euro sell action to hit highest, selling gold action which in a day drop to 5000 pips ($ 50), on the other hand they do buy the dollar as a protection move. This is perception vs. reality.


Until when the entire dollar stock will continue? To me, there are two answer:
  1. Until get out a news release from the European Union regarding Greece/Spain/Portugal which is calming the market, and this will trigger short-covering the Euro, may we see the EU's rise quickly.
  1. Technicallly, dollar index approaching the level of 50.0% fibo line (on the chart above) from a down wave since March 2009, which can be a strong resistance withstand the rising dollar.
That is why as a forex trader I put the sentiment indicator (COT, VIX, SW FX, SSI) as important indicators in quantify and see the market participants behavior before taking any investment or forex trading decisions.