There could be valid grounds to suggested that all Trading or investing is based upon The Greater Fool Theory (T.G.F.T.) which could perhaps, have been scribed on a Stone or Clay Tablet in a far off distant Galaxy or here in the past and just maybe found, hidden but written in the Forexmos S.T.A.R.'s or even written inside an Ancient Scroll somewhere. Things in life, do have the habit of re-orbiting, in Time, so with this in mind I would also suggest this post, maybe for some, is once again being read from a Tablet but not the so ancient ones, no, more over, the branded and logo digital type we see Traded all around us in retail outlets and in online stores. T.G.F.T. has seemingly reoccurred almost since time began or at the very least, buying and selling, exchanging or bartering. So the following will explain a little of what that means and a suggestion about viewing Forex in that light, along with a definition.
The Retailing concept dates back to Ancient Times, where products were exchanged within Ancient civilizations, goods exchanged for goods, skills for goods, goods for skills, food for other food, weapons for food and so on. Individuals and groups of people like tribes, villages and complete Empires would have exchanged their goods, tools, food, livestock and land in some formal shape of a bartering system and whether learned or instinctively, would of have grasped the idea or a form of T.G.F.T. and held it in the forefront of their minds. Needless to say, a practice that still continues to this day.
The Greater Fool Theory can also be explained as an Economic Term, potentially involving everyone:
The Greater Fool Theory Definition:
On observation, any price no matter how unrealistic and not by any intrinsic value neither, over valued, over bought and so on, can be justified if a buyer believes that there is another buyer who is willing to pay more at a later stage. This could of course be immediate or even a longer term assumption and speculation that the price will continue. Thinking along these lines of Nature, it is not beyond the scope of reasonable thinking to see this, if left unchecked, eventually will lead the Herd and some individuals to some sort of Paranoia, this in-turn will become the Parent thought and creator to offspring for unstable reactions, like Fear and Greed.
T.G.F.T. in Trading Forex
If a trader buys or sells a currency pair then the aim is to see that pair rise or fall respectively and in doing so, put the Trader in a position to Profit.
Therefore, if a Trader buys a currency pair and ends their trade for a profit then the other Traders and the Market were the greater fool because they have all just paid more and the Market went or continued to be a Bull Market against them. Thus a profit was gained for the said Bullish Trader.
On the reverse side of the Currency Coin, we can also say, if a Trader buys a currency pair and ends their trade at a loss then that Trader themselves were the greater fool because they have just paid more than the other Traders and the Market went or continued to be a Bear Market. Thus a loss was incurred for the said Bullish Trader.
Respectively, exactly the same can be said for the opposite, a Trader Selling or Shorting the Market, when in fact the price rises or continues to rise against that Bear trader.
Some Examples of Markets over bought and over sold:
EUR/USD being over bought in 2008 and before any news announcements, rumors or even listening to the emotional and psychological Twins, namely Fear and Greed. However, some traders may have had a mindset, through various abilities and experiences, to be in a position to see and then prepare for the otherwise, thus avoiding the aforementioned Herd instinct.
2008 Over bought EUR/USD with appropriate Early Pattern Recognition (EPR)
2008 EUR/USD - The Over bought and Appropriately named "I See Dead Countries" EU Chart which is a snap shot of my entry trade
2012 - GBP/JPY Oversold
Wider spectrum and Matrix
The Greater Fool Theory (T.G.F.T.), on a much wider spectrum happens throughout all things and perhaps if Morpheus from the Matrix films was to comment, he just might of said, "The Greater Fool Theory is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth."
Boom and Bust and Natural Cycle of Life
Markets will continue to Rise and Fall, Boom and Bust scenarios will play out, Financial Bubbles will continue to inflate and then burst for whatever the reason and naturally, relative to Time Frames. Countries, Governments, Politicians, World News, the Fed Banks, Europe, Businesses and the like, whatever is said or promised, will always be a treadmill and Natural cycle of Life. Therefore, safe Trading will depend on several things to be kept in mind, like, Trading is about Y.O.U. and nobody else, develop a great sense of awareness, utilize the valuable and mainly untapped resource and commodity inside all of us, called common sense, and if all else fails prepare a great stop loss technique along with an exit strategy to keep afloat, after all, That's Life.