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Looking At Behavioural Bias In The Foreign Currency Exchange Market

May 4, 2009 by  
Filed under Forex Market

There are many different personality types within the foreign currency exchange industry, however many of them have been compared to that of the narcissistic personality type. It has been noted that successful traders often show traits common to those defined as diagnosed narcissists. This is due to the presence of such characteristics as extreme confidence, egotism, impartial disregard for others and excessive discipline. However, even with these strong leadership traits, the trader will still show behavioural bias. By maintaining these biases, the trader can potentially place both himself and the associated brokerage in harm’s way. Below are some well-known behavioural bias which may often be seen among successful traders.

The first, and most frequently detected, behavioural bias is that of overconfidence. It is often noted as having two core components – an overconfidence in the quality of information the trader is working with, and an overconfidence in the method with which he is trading. By employing the presented information in an egotistical and narcissistic manner, the trader will be acting upon potentially erroneous and irrational facts. This biased behaviour can lead to poor trades and detrimental losses.

A method one may employ in which to avoid this type of bias is to trade less frequently. By reducing the amount of trading, and rather investing the capital, one will have more time to attain a deeper understanding of the forex market and its internal processes.

One troublesome behaviour seen among traders, particularly the more conservative traders, is the ‘reducing regret’ behavioural bias. This type of behaviour can most easily be described as engaging in a certain behavioural act so as not having missed the opportunity to have completed that task. For example, getting a piercing or tattoo so as not to miss out on the experience.

Within the forex market, this ‘reducing regret’ behaviour refers to when a trader holds a position despite its long-standing pattern of losses. He will continue to maintain this trade until the majority of the rate value has dissipated, and then he will sell. This seems confusing, but is done in order to decrease any regret should the rate values have increased. To avoid this type of behavioural bias it is best to determine and adhere to a set of personal trading rules.

The final, and probably most important, behavioural aspect to consider when trading on the forex market is that of attention. This is not referring to others attention on you, but rather your ability to focus on the market and trading. The forex market is expansive and if one is not paying attention, he can be lost among the bright lights and noises. It is difficult to establish a method in which to avoid the loss of focus, as many personalities present with this as a trait. However, with the correct training and mentoring one can learn to increase your level of alertness and spotlight your trades.

In order to be a successful trader one must be highly dedicated and objective. It is when we lose this objectivity and allow for our personal biases to override our judgement, that we are faced with career-damaging behavioural biases.

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