Behavioral finance is the ultimate perspective in understanding what leads to success and failure in the world of trading forex or foreign currencies, which is fast, leveraged, and affected greatly by human psychology.

Traditional theories of finance essentially force the reader to conclude that traders are always rational. However, behavioral finance describes the many ways traders ruse their emotional side and are influenced by cognitive affectations. For instance, a trader might fear the loss of a (winning) position and exit early to lock in a profit, or be overly greedy and over-leverage to higher risk, or experience herd mentality and nearly critically follow traders into an entry with horrible risk: reward, or from an exit where the trade and price should be according to an unrecognized trading paradigm.

In the same way loss aversion tends to keep a trader holding a losing trade way longer than is rational, over-confidence might lead a trader into excessive risk taking. A trader’s behavior and these biases, repeated millions of times by millions of traders, shape market sentiment to eventually create trends (or to reverse them). Knowing or simply recognizing biases leads traders to be more disciplined, consistent in their ability to apply risk management, and remain objective in the decision-making process during a highly volatile psychological (trading) environment, rancorous with emotional triggers.

The application of conducting a trading journal, holding true to rules (like stop-loss orders), and only trading when mindful can all allow players to witness and acknowledge triggers and therefore eliminate a part of their impulsivities. In the chaotic environment of forex, being able to learn about oneself through mastering psychology can often be as impactful (if not more so) as mastering chart patterns or economic indicators.