The majority of forex rates traders believe trading is all about the physical. They believe it is about selling and buying currencies, analysing the market trends, employing your trading strategy. Yet, there is much more to trading the forex rates market than the physical; we have to consider the psychological and emotional factors as well.
Many traders choose to ignore the mental aspects of the forex market and thus find themselves in psychological distress when dealing with forex rates – sometimes without realising it.
Below are the three most common situations seen in the market.
The Social Contagion
Social contagion is also known as group behaviour or mob mentality. This mentality is almost always evident in forex trading, particularly when a trader is following a trend movement. There are times when this is most beneficial; however it can be detrimental to your trading. When one blindly follows a crowd, there is a loss of rational logic and reasoning. You base your decisions on the crowd’s opinions and this, if they are incorrect, can lead to extravagant losses. The bias behaviour is not based on independent research, but on information drawn from forums and other groups. This is known as social trading.
In order to avoid any disadvantageous behaviour of this sort, it is best to view any rumours as invalid. Always conduct your own research and analysis on any tips received before following any trends. It’s better to confirm the source and verify information than suffer the consequences.
Forex Rates and Behavioural Bias
A successful trader always validates information before using it on the market. While this is a positive behaviour, there are instances where traders engage in what is known as information bias. In order to maintain a positive strategy and analysis, they will only use information which confirms their speculations. By neglecting to include contradictory data, the trader is creating a subjective strategy based on bias. To avoid this you should train yourself to investigate and incorporate both complementary and contradictory information.
A further behavioural bias is that of confirmation bias. This involves traders seeing the aspects of the analysis and trade that benefit themselves, and not anything else. They will search for these complementary factors and ignore all other ‘negative’ features of the trade. In order to overcome this behavioural bias, one should take the time to read and accept all the information you are presented with.
The Feeling of Overconfidence
One of the most important characteristics a trader should display is that of confidence. A successful trader must feel confident about his trading once the analysis and research has been completed. If not, he will constantly be second guessing himself and will find himself making an emotional trade. However, overconfidence is as severe a problem as a lack of confidence. This trait can be seen among those who have experienced successive profitable trades; for they believe they have the perfect strategy and are ‘invincible’. This is acceptable if they continue to conduct adequate analysis, but due to their grandiosity, these traders take ‘short cuts’ in their analysis believing it won’t cause any damage to their trading. This foolishness often leads to disadvantageous trades and losses.
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