What is 'Trading Psychology'

Trading psychology refers to the emotions and mental state that help to dictate success or failure in trading securities. Trading psychology represents various aspects of an individual’s character and behaviors that influence their trading actions. Trading psychology can be 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'

Trading psychology can be associated with a few specific emotions and behaviors that are often catalysts for market trading. For an understanding of these qualities, consider some of the leading examples.

Greed is an excessive desire for wealth. It often causes traders to stay in a profitable trade longer than is advisable in an effort 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 wind.

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 significant selloffs in the market from panic selling.

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 direct losses from security prices that are falling from peak highs.

Technical Analysis

Trading psychology is often important for technical analysts relying on charting techniques to drive their trade decisions. Security charting can provide a broad array of insights on a security’s movement. While technical analysis and charting techniques can be helpful in spotting trends for buying and selling opportunities, it requires an understanding and intuition for market movements which is derived from an investor’s trading psychology.

There are numerous instances in technical charting where a trader must rely not only on the chart’s insight but also their own knowledge of the security their following and their intuition for how broader factors are affecting the market. Traders with a keen attention to comprehensive security price influences, discipline and confidence show a balanced trading psychology that typically contributes to profitable success.

RELATED TERMS
  1. Loss Psychology

    Loss psychology is about the emotional side of investing and ...
  2. Market Psychology

    Market psychology is a term used to describe the sentiment financial ...
  3. Day Trader

    Day traders execute short and long trades to capitalize on intraday ...
  4. Technical Analysis of Stocks and ...

    Technical analysis of stocks and trends is the study of historical ...
  5. Line Chart

    A line chart connects a series of data points with a line and ...
  6. In And Out

    In and out is a trading strategy whereby shares of a single security ...
Related Articles
  1. Trading

    An Introduction to Consensus Indicators

    Learn how the herd is almost always wrong, or at least late in jumping on the bandwagon.
  2. Trading

    How Market Psychology Drives Technical Indicators

    The tenets of market psychology underlie each and every charting tool.
  3. Investing

    Financial Markets: When Fear & Greed Take Over

    If these unpleasant emotions are allowed to influence your decisionS, they may cost you dearly.
  4. Investing

    Are Your Emotions Getting the Best of Your Investments?

    Behavioral finance studies the emotional side of investing and its effects on investor returns.
  5. Trading

    Learn How to Trade the Market in 5 Steps

    Learn how to trade the markets with skill and authority, starting with these five basic concepts.
  6. Trading

    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.
  7. Trading

    Trade on Support for the Best Exit Strategy

    Find your exit strategy based on support and resistance levels, while understanding the psychology.
  8. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
Trading Center