Trading Psychology

Definition - What does Trading Psychology mean?

Trading psychology refers to all the human impulses that have an effect on the forex market. Trading psychology is not a true field of academic study, but some traders pay as much attention to the thought processes of other traders as they do to market indicators in hopes of finding a trading edge.

ForexDictionary explains Trading Psychology

There are many examples of trading psychology phenomenon in the currency markets. For one, entry and exit orders tend to group at round numbers like 1.3450 rather than 1.3453. This reflects a human desire for tidy numbers, whereas a trading program told to take profit at 50 pips will execute whether the number is tidy or not. Another interesting phenomenon is the market reactions to news. Whether news is significant or not, there tends to be volatility before, during and after an announcement that is out of proportion with the actual impact when viewed on a longer time scale.

Traders who study these human quirks in the market data can take advantage in various ways. The most obvious is to place trades around significant round numbers and move in on news events very early or as enthusiasm flags and prices revert.

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