The Psychology of Foreign Exchange Market.

If you are interested in how psychology influences the foreign exchange
market, this is the book for you. This book 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.

1. 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.’’

2. 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.’’

3. 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.’’


4. 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.’’

5. Market rumors:
‘‘Rumors are in the markets all the time and markets move!’’

6. 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!’’

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