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The Psychology of the Foreign Exchange Market

The Psychology of the Foreign Exchange Market

Thomas Oberlechner

ISBN: 978-0-470-01201-7 July 2005 278 Pages




This book demystifies the foreign exchange market by focusing on the people who comprise it.  Drawing on the expertise of the very professionals whose decisions help shape the market, Thomas Oberlechner describes the highly interdependent relationship between financial decision makers and news providers, showing that the assumption that the foreign exchange market is purely economic and rational has to be replaced by a more complex market psychology.



1 From Rational Decision-Makers to a Psychology of the Foreign Exchange Market.

Traditional vs. behavioral finance: A paradigmatic shift in approaching financial markets.

Economic defense of the efficient market view.

Traders’ views of rationality in the foreign exchange market.

Toward a market psychology.

Abbreviated references.

2 Psychology of Trading Decisions.

Trading decisions: The view of traders.

Excursion: Understanding decision-making in financial markets.

From objective prices to psychological theories of decision-making.

Normative–economic and descriptive–psychological approaches.

Social herding dynamics.

Herding and psychological conformity.

Herding dynamics in the foreign exchange market.


Status quo tendency.


Trading intuition: Bridging affects and cognitions.





Anchoring and adjustment.

Hindsight bias.

Abbreviated references.

3. Risk-Taking in Trading Decisions.

Asymmetric risk-taking.

Framing and mental accounting.

Managing trading risk: Institutional and personal strategies.

Abbreviated references.

4 Expectations in the Foreign Exchange Market.

Expectations: A market time machine.

Fundamental and technical/chartist analysis.

Psychological attitudes and market expectations.

Social dynamics, meta-expectations, and the financial news Media.

Abbreviated references.

5 News and Rumors.

Characteristics of important information.

From news sources to information loops.

Information sources of foreign exchange traders.

Information sources of financial journalists.

Implications for collective market information-processing.

Reporting trends and interdependency.

Market rumors.

Abbreviated references.

6 Personality Psychology of Traders.

The role of personality in trading.

What makes successful traders?

Disciplined cooperation.

Tackling decisions.

Market meaning-making.

Emotional stability.


Interested integrity.

Autonomous organization.

Information handling.

Market applications.

Abbreviated references.

7 Surfing the Market on Metaphors.

Main market metaphors.

The foreign exchange market as a bazaar.

The foreign exchange market as a machine.

The foreign exchange market as a living being.

The foreign exchange market as gambling.

The foreign exchange market as sports.

The foreign exchange market as war.

The foreign exchange market as an ocean.

Metaphors shape market perspectives.

Market metaphors are about the psychological “other”.

Market metaphors are about market predictability.

Explicit and implicit metaphors of the foreign exchange market.

Market metaphors in action.

What we can learn from market metaphors.

Abbreviated references.

8 The Foreign Exchange Market—A Psychological Construct.

The market as a construct and illusion.

Market constructs change.

Abbreviated references.

9 The Basics.

Function and scope of the market.



Dealing room structure.

Market players.

Commercial and investment banks.

Central banks.


Investment companies, pension funds, and hedge funds.

Corporations and multinational companies.


Global financial news agencies.

Abbreviated references.

Appendix: The European and the North American Survey.

Abbreviated references.



“…there are enough gems in there to keep you reading on.” (The Technical Analyst, March/April, 30th March 2005)

"...a fascinating and entertaining read..." (Economic Issues, June 2006)