He is well liked by colleagues. Companies that operate internationally consider foreign exchange rates when deciding, for example, where to locate their production sites, where to buy supplies and hire workers, and how to determine the prices of their products. The foreign exchange market as a bazaar. Most foreign exchange traders do not require an overnight position limit because they close their trading positions in foreign currency by the end of the trading day. Much of trading, after all, is psychology! So it is a very intimate relationship. To summarize, the living being, the ocean, and the war metaphors are used more often implicitly than explicitly, and the bazaar and the sports metaphors are produced more often explicitly than implicitly.
This sets in motion a homogenizing and self-regulating process of decision-making on the collective market level. Moreover, group dynamics among traders can indeed lead to the result that the advice of others 26 The Psychology of the Foreign Exchange Market produces bad trading decisions. I am a veteran forex dealer and in-house trainer of our dealers; this book is required reading. What exactly are these entailments? Market meaning-making involves intuition, thus allowing traders to rapidly anticipate possible market developments. Market metaphors are about market predictability.
For example, it explains the tendency of market participants to close winning trading positions too early and to let losing trading positions ride too long. Just now there are several big funds that will wait until this guy writes his piece before they put out their positions. Thus, they attempt to anticipate the extent of possible regret involved in each decision alternative, compare the alternatives by the amount of anticipated regret, and then decide on a way that helps them limit future regret to a minimum. The decision-making portrayed by market participants is highly dynamic and takes place in the midst of a constantly vague market setting. Studies have shown that even such experts as highly experienced chess masters habitually base their decisions on heuristics. Could it be true, could it be wrong? It is indispensable in my life. What made you sell your position in dollar? What participants in the experiment did not know was that the eight other persons in the group were actually confederates of the experimenter who were instructed to at times unanimously respond with a wrong judgment.
At Webster University Vienna, Sherri Acknowledgments xiii Speck, Eva Berger, Steve Chaid, Dessislava Dantcheva, Clemens Dudek, Arturo Cruz Esparza, Guy Kehila, Karl Kinsky, Thomas Krenn, Gernot Mittendorfer, Irena Radman, Ingrid Scho¨rghuber, and Claudia Westermayr were part of the highly synergistic team that collected data from European market participants. What do I think about it? When traders address the close link between such implicit cognitions and an experienced feeling in their decisions, they usually refer to trading intuition. That people get carried away. Trading intuition: Bridging affects and cognitions. Like the recognition-primed decision model, the following exploration of foreign exchange decisions also rests on interviews with the actual decisionmakers.
Is it good, is it bad? Financial journalist While the previous section has analyzed the characteristics of information important to traders, our understanding of how information and news are processed in the foreign exchange world would be incomplete without considering the actual information sources. Only every 14th trader 7% considers himself or herself less successful than other traders. And at those precise points. Work hard at knowing your own limits. While chess Psychology of Trading Decisions 53 experts have access to a large number of possible board patterns that almost instantaneously bring to mind suitable moves at various stages and situations of the game, expert traders have a vast repertoire of stored market situations available, and, rather than calculating, they base their decisions on associations of the present with the past. In order to avoid an imminent loss, traders may become highly risk-seeking and engage in courses of action they would otherwise clearly consider as too dangerous.
In stark contrast, the U. To answer this question, we need to explore the link between attitudes and expectations. The use of the representativeness heuristic leads market participants to base their inferences simply on the apparent resemblance between two situations, at the expense of other information. For their own trading decisions, traders consider emotions a two-edged sword that is both helpful and hazardous. Rather than thinking, feeling, and behaving merely as individuals, traders are members of a social collective.
Because then all of a sudden everybody is acting on exactly the same information, which would mean nobody has the advantage. Prices can change every second. The Swiss franc will be stronger in December than in July. However, how can these attitudes best be analyzed? Personal characteristics such as being strong, brave, and fearless are considered decisive in this setting. Trading and investment decisions are particularly relevant examples, but they are by far not the only ones. I think this is the utmost formalization. Once the anchor is chosen, usually the following adjustment is only small.
On the one hand, some traders observe that the role of irrationality has increased. Is it a part of human rationality? Today, however, a number of international corporations have become highly sophisticated in their foreign exchange operations, building their own trading departments that boast trading and information technology matching those of banks. Leading banks are perceived of as more credible and informed than other banks and may move the market temporarily by merely inquiring about a currency. Moreover, whereas Taylor and Allen surveyed chief foreign exchange traders in London, the European study included traders on all hierarchical levels. It implies that people are fundamentally risk-averse i.
Federal Reserve will change interest rates at least three times and the U. Foreign exchange dealing is supervised by treasurers, who carry overall responsibility, and by chief dealers, who are responsible for teams of traders. Understanding the market through the metaphors of participants portrays market decisions not as economic givens but as psychological constructions. Here, too, for many decades the connection between personality and work performance was questioned. Finally, they may think that such aspects of rational choice as invariance and transitivity are not only intuitively appealing on a theoretical level, but that they describe actual human choice behavior. Appendix: The European and the North American Survey.
The truth is, the operation in foreign exchange—to buy or to sell—is never the same, and the information set is never the same, and the circumstances are never identical. You have the trading room manager, you have a department head, you have a chief trader, you have a deputy chief trader, you have a senior trader, and you have a junior trader. Thus the loss aversion expressed by the value function of prospect theory may also be the reason traders frequently report a disproportionally strong emotional reaction after losses, which by far surpasses the intensity of emotions after gains. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. Note that, when discussing their trading experience in the interviews, traders were not aware of the factors that had resulted from the systematic survey data.