Question

"The herd instinct among forecasters makes sheep look like independent thinkers." by Edgar R. Feidler. Discuss this quotation in terms of foreign exchange rate determination.

Answer 1

This quotation in terms of foreign exchange rate determination means that sentiment can be valuable when there is a need to determine, analyze and evaluate trends that exist in the foreign exchange marketplace. But the quote suggests that while the sentiments can be useful for determining and evaluating trends it can also lead to a downside. This happens when the consensus ‘herds’ to one side. In case of herding of consensus with regards to foreign exchange rate movements the herd is usually and in most cases wrong.

When it comes to foreign exchange rate determination often many analysts and forecasters makes use of herd instinct by adhering to the general consensus. They will predict the foreign exchange rate movements in that direction which is being predicted by most other analysts. This is done without proper technical analysis and fundamental analysis. Such analysts often end up making wrong prediction and the foreign exchange rate movement as predicted by them is usually far from accurate.