Trading Psychology

DEFINITION of '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.

BREAKING DOWN 'Trading Psychology'

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.
RELATED TERMS
  1. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
  2. Emotional Neutrality

    The concept of removing greed, fear and other human emotions ...
  3. Loss Psychology

    The emotional aspects associated with investing and the negative ...
  4. Fear And Greed Index

    An index developed and used by CNNMoney to measure the primary ...
  5. Profit Target

    A predetermined point at which an investor will exit a trade ...
  6. Lemming

    The act of an investor following the crowd into an investment, ...
Related Articles
  1. Options & Futures

    The Importance Of Trading Psychology And Discipline

    Find out how investing success can be more about your mindset and less about the markets.
  2. Active Trading

    The Financial Markets: When Fear And Greed Take Over

    If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly.
  3. Investing Basics

    Master Your Trading Mindtraps

    Traders are only human; therefore, they are subject to psychological traps when they trade. Read how you can manage your emotions so that you can profit from your trading.
  4. Forex Education

    Step 9: Keep Emotions At Bay

    Want to invest but don't know where to start? Learn how to make your money work for you with these tips.
  5. Forex Education

    No.6. Fear and greed are stronger than long-term resolve.

    Find out what most investors are doing wrong, and how you can do it right.
  6. Home & Auto

    Top 8 House-Hunting Mistakes

    Searching for a house is a pressure filled task filled with quick decisions that could affect your financial future.
  7. Credit & Loans

    Credit Crisis: Lessons Learned

    By Brian PerryEven at the height of a great bull market, successfully navigating the financial markets is a challenge for investors. This challenge is magnified exponentially during market crises. ...
  8. Active Trading Fundamentals

    Five Biggest Obstacles Facing First-Year Traders

    Address these five obstacles and you'll make significant progress as a first-year trader.
  9. Investing

    How to Develop a Trading Brain

    For traders to achieve true discipline, they need to more than just accept the idea.
  10. Trading Strategies

    Choose Abundance and Manage Your Trades Like A Pro

    Professional traders build skills to last a lifetime, not just through the next rally or selloff. Cultivate the psychology and skills that make a successful trader.
RELATED FAQS
  1. How can I tell if I'm an emotional investor?

    Successful investors possess the important trait of emotional stability, which means that they base their investment decisions ... Read Answer >>
  2. How do I stop emotional spending?

    Emotional spending occurs when an individual spends money for the sole purpose of improving a mood. Some reasons people engage ... Read Answer >>
  3. What are common investing mistakes in bear markets?

    Learn why investing in a tumultuous market can be challenging even for the most experienced investors. Avoiding these common ... Read Answer >>
  4. What is the difference between investing and trading?

    Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing ... Read Answer >>
  5. How should young people invest in a bear market?

    Learn strategies young investors can implement during a bear market that present the greatest opportunity for long-term investment ... Read Answer >>
  6. Is it better practice to use a stop order or a limit order?

    Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center