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Best forex articlesTrade Forex On Herd Instinct

"Herd instinct" in the investing lexicon refers to the tendency of traders to blindly follow an established investment trend or pattern. Such traders are typically adherents of the well-known investment axiom "the trend is your friend." This principle is likely to provide better returns in forex trading than in equities trading for a couple of reasons.

Firstly, forex trading is arguably driven by technical analysis to a greater extent than stock trading, given that fundamental analysis plays a much bigger part in the latter than it does in the former. Secondly, while the forex market is the world's most liquid financial market with estimated daily turnover exceeding $4 trillion in 2010, just six currency pairs USD/euro, USD/yen, USD/sterling, USD/Australian dollar, USD/Swiss franc and USD/Canadian dollar accounted for two thirds of this trading volume. (Conversely, blue-chip stocks on the major global equity exchanges collectively number in the thousands).

These currencies are avidly watched by legions of currency traders around the world, and the same technical levels are monitored around-the-clock by these traders for buy and sell signals. Once a key technical gives way, other traders jump in and reinforce the initial trend, thus exacerbating the herd effect.