If you are interested in how psychology inﬂuences the foreign exchange market, this is the book for you. The Psychology of the Foreign Exchange Market sheds light on spectacular market phenomena as well as on subliminal psychological processes in trading decisions. New insights are gathered from psychological theory, survey research studies with leading foreign exchange participants, and ﬁnally one-on-one interviews with trading experts. Combining these insights, the book oﬀers an innovative psychological understanding of the daily decisions that determine exchange rates.
The following statements from foreign exchange experts provide a ﬁrst glimpse at the variety of topics explored.
- Personality characteristics involved in successful trading—the trading manager of a leading bank declares: ‘‘I think you could be a good trader based on trading and experience, but you can’t be excellent. There is something that is inherent in the very best traders that other people just don’t have.’’
- Asymmetric risk-taking after gains and after losses may lead traders to take excessive risk to make up for previous losses. As one trader explains the case of Nick Leeson, whose trading losses brought down an entire bank: ‘‘He was just emotionally attached to his position; he just couldn’t ever believe that he was going to be wrong.’’
- Meta-expectations (i.e., market participants’ expectations about the expectations of other market participants): ‘‘That is what I call market psychology: understanding what people are thinking, why they are thinking it, or what stage of the game they are at.’’
- Trading intuition: Explaining a recent trading decision, one experienced trader remarks: ‘‘People asked me, ‘Why did you do that?’ I said, ‘I don’t know.’ And that’s the truth, I don’t know. For instance, I walked in last Monday, and I was just wandering around. And then I just got this light shining on me, and I said ‘[the pound] sterling is going a lot lower today!’ There is no economics; there is no chart; there is no anything, except for ‘Well, I think.’ And I sold quite a lot of it, and it collapsed, and I made a hell of a lot of money. And I could not explain why I had done it.’’
- Market rumors: ‘‘Rumors are in the markets all the time and markets move!’’
- Market metaphors translate the abstraction of the market into psychological reality. In the words of one trader: ‘‘I think it is a battleﬁeld—like boxing every day. I compete and struggle with the markets. They are very tough, always, and they test me. I need to always be ready to ﬁght.’’
- As another trader explains, these metaphors have important consequences for trading decisions: ‘‘If you don’t like a certain counterparty, for example, you end up like you try to ﬁght against him, with sometimes taking silly positions which under normal circumstances you would not. And this normally causes a lot of losses!’’
Centuries ago, seafarers who engaged in historic journeys of discovery struggled with images of demons on the borders of their maps, indicating the dangers of the unknown. Likewise today, the new ﬁeld of market psychology is another vast ocean whose many riches have only begun to be discovered. The book promises to take the reader on this exhilarating voyage, explaining the psychological dynamics that shape today’s foreign exchange market.
- From Rational Decision-Makers to a Psychology of the Foreign Exchange Market
- Psychology of Trading Decisions
- Risk-Taking in Trading Decisions
- Expectations in the Foreign Exchange Market
- News and Rumors
- Personality Psychology of Traders
- Surfing the Market on Metaphors
- The Foreign Exchange Market—A Psychological Construct
- The Basics