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. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  3. Panic Selling

    Panic selling refers to wide-scale selling of an investment, ...
  4. Active Trading

    Active trading is the buying and selling of securities with the ...
  5. Market Dynamics

    Market dynamics are the pricing signals that are created as a ...
  6. Market Sentiment

    The overall attitude of investors toward a particular 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

    Are You Ready to Trade Futures?

    If you want to trade futures to become rich, you'll have to answer some questions first.
  6. Trading

    3 Psychological Quirks That Affect Your Trading

    There are human tendencies that can block our financial goals. Here's how to get around them.
  7. Investing

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  8. Investing

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  9. Investing

    How To Outperform The Market

    Active trading is an investing style that aims to beat the market. Find out how it works, and whether it will work for you instead of buy-and-hold.
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. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center