Forex Market Trading Psychology
The boundary between judgement and decision making is not always clear. Many decisions are based on believes concerning the likelihood of certain events such as the value of a currency. Occasionally believes concerning uncertain events are expressed in numerical form or odds or subjective probabilities.
How do people assess the probability of uncertain event or the value of a fluctuating currency? People normally rely on a limited number of heuristic principles which reduces the complex task of assessing probabilities and predicting values to a simpler judgemental operations.
Heuristics refer to the usage of reasoning and past experiences to solve a problem or make a decision. In a world of uncertainty, there is no fool proof or absolute guarantees about the future. Even heuristics based decision making can lead to severe and systematic errors.
Here are some common pitfalls traders fall into in their quest to maximize their income in minimal time:
- 1. Misconception of chances
- 2. Illusion of validity
- 3. Biases due to retrievability of instances
- 4. Personal anchoring