Psychology, not facts, key to forex market: Study

Thursday, August 21 1997

Psychology, not facts, key to forex market: Study

REUTER

London, Aug 20: Psychology plays a bigger role in foreign exchange traders' decisions than factual information, a study about the relationship between financial journalists and dealers shows.

The study, conducted by professors Sam Hocking and ThomasOberlechner of Webster University in Vienna, found the interdependence between traders and electronic news service journalists has grown to such a degree that both should now be considered market participants.

The report is compiled from two years of research based on questionnaires and interviews with traders and strategists at Europe's largest banks and central banks, and with financial journalists.The interdependence between traders and journalists has increased as technological developments such as electronic real-time financial news have dramatically influenced the role of information in currency markets.

"The recent past has seen an increasing crossing of the border between trading institutions and supplies of financial news," the study said.This interdependence, dubbed a "dance in the ballroom of the market" by the authors and "a giant octopus feeding off itself" by one journalist, relies on information being processed in a circular way, with both traders and journalists using each other as the main information source.

"In this circular loop ... information can be equally shaped into reality by both partners of the dance and may easily develop a dynamic of its own," the report said.

Expectations play a substantial role in the psychology of the market. The study found these expectations are formed in subjective ways and often have a self-serving tendency in an attempt to anticipate the expectations of other traders.Credible rumours thus usually turn into a temporary market reality. "True and accurate information is not that important, because if the rumours seems plausible, the market will go with it," the study said.Market movements often accelerate when the herd effect grabs hold of traders and reporters.