Trading Psychology



The emotions and mental state that dictate success or failure in trading securities. Trading psychology refers to the aspects of an individual’s mental makeup that help determine whether he or she will be successful in buying and selling securities for a profit. Trading psychology is as important as other attributes such as knowledge, experience and skill in determining trading success. Discipline and risk-taking are two of the most critical aspects of trading psychology, since a trader’s implementation of these aspects is critical to the success of his or her trading plan. While fear and greed are the two most commonly known emotions associated with trading psychology, other emotions that drive trading behavior are hope and regret.


For an understanding of trading psychology, consider some examples of the emotions associated with it.

Greed is an excessive desire for wealth. Greed often causes traders to stay in a profitable trade longer than is advisable in a bid to squeeze out extra profits from it, or to take on large speculative positions. Greed is most apparent in the final phase of bull markets, when speculation runs rampant and investors throw caution to the winds.

Conversely, fear causes traders to close out positions prematurely or to refrain from taking on risk because of concern about large losses. Fear is palpable during bear markets, and it is a potent emotion that can cause traders and investors to act irrationally in their haste to exit the market. Fear often morphs into panic, which generally causes markets to decline at a much faster rate than they advance.

Regret may cause a trader to get into a trade after initially missing out on it because the stock moved too fast. This is a violation of trading discipline and often results in the trader getting in too late on the trade.

Successful traders have some common psychological traits that contribute to their success. These traits include –

  • Know your limits and do not over trade.
  • Risk management is the key to preserving trading capital and attaining trading success.
  • Maintain trading discipline at all times.
  • Know the difference between not fighting the trend and following the herd.

  1. Sunk Cost Trap

    The tendency of people to irrationally follow through on an activity that is ...
  2. Relativity Trap

    A psychological or behavioral trap that leads people to make irrational choices ...
  3. Superiority Trap

    A psychological or behavioral trap that leads people to believe that they have ...
  4. Confirmation Bias

    A psychological phenomenon that explains why people tend to seek out information ...
  5. Behavioral Finance

    A field of finance that proposes psychology-based theories to explain stock ...
  6. Herd Instinct

    A mentality characterized by a lack of individual decision-making or thoughtfulness, ...
  7. Irrational Exuberance

    Unsustainable investor enthusiasm that drives asset prices up to levels that ...
  8. Prospect Theory

    A theory that people value gains and losses differently and, as such, will base ...
  9. Anchoring

    The use of irrelevant information as a reference for evaluating or estimating ...
  10. Loss Psychology

    The emotional aspects associated with investing and the negative sentiment associated ...
Related Articles
  1. Master Your Trading Mindtraps
    Investing Basics

    Master Your Trading Mindtraps

  2. The Downward Spiral Of Trading Addiction ...
    Investing Basics

    The Downward Spiral Of Trading Addiction ...

  3. Follow The Herd In Trading The Capital ...
    Trading Strategies

    Follow The Herd In Trading The Capital ...

  4. Avoid These Common Investing Psychology ...
    Investing Basics

    Avoid These Common Investing Psychology ...

  5. How To Develop A Trading Brain

    How To Develop A Trading Brain

  6. 3 Psychological Quirks That Affect Your ...
    Active Trading Fundamentals

    3 Psychological Quirks That Affect Your ...

  7. The Importance Of Trading Psychology ...
    Options & Futures

    The Importance Of Trading Psychology ...

  8. Getting Through The Rough Patches In ...
    Active Trading

    Getting Through The Rough Patches In ...

  9. Finding The Right Trading Coach
    Active Trading

    Finding The Right Trading Coach

  10. How To Break Bad Trading Habits
    Active Trading

    How To Break Bad Trading Habits

comments powered by Disqus
Hot Definitions
  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  3. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  4. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  5. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant
  6. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
Trading Center