Understanding Trading Psychology

Stock and bond markets are fundamentally groups of people all trying to make decisions with incomplete information. Understanding psychology can be key to learning the way decisions are made.

Frequently Asked Questions
  • How do you be emotionless while trading?

    While it’s impossible to completely eliminate emotion from human thinking, there are ways to limit irrational thinking while trading. The key is to understand the cognitive biases that humans have and adjust your behavior accordingly. In addition, don’t deviate from investing plans you’ve made in advance just because of a downswing in the market, as you’re likely to react too strongly out of fear.

  • What is trading psychology?

    Trading psychology is the application of the field of psychology to financial trading. Doing so allows you to understand the ways in which humans react to financial markets in ways that follow human biases. This can help understand how the market works the way it does as well as minimize these in your own trading. The relationship between finance and psychology is explored in the field of behavioral finance.

  • What cognitive biases undermine traders?

    While virtually any cognitive bias or other psychological pitfall can hurt trading, two of the most common are confirmation bias and the sunk cost fallacy. Confirmation bias is when you give more weight to data that confirms what you already believe while giving less to info that proves you wrong. It’s critical to try and work extra hard to evaluate and take onboard data that disproved your ideas, as your first instinct will usually be to discount it. The sunk cost fallacy is the idea that previous losses or costs should contribute to your decision, making when nothing you can do will get them back, and so you should only make trading decisions based on their effect on the future. For example, if you’ve invested a lot in a business that turns out to have a bad business model, you should act as if you were looking at it as a fresh investment without regard for money you’ve lost previously.

Key Terms

Explore Trading Psychology

Behavioral Finance concept. Stack of business documents and marker.
An Introduction to Behavioral Finance
Random Reinforcement: Why Most Traders Fail
5 Things Amateur Investors Say Too Often
Investment risk
8 Psychological Traps Investors Should Avoid
An analyst works on a personal computer showing statistics.
How to Avoid Emotional Investing
Businessman grabs the head concept with business chart on scoreboard
Black Swan Events and Investment
The Casino Mentality In Trading
How the Power of the Masses Drives the Market
3-D multicolored pie chart of pie slices
Peace Dividend
Above angle view of a young man using a trading app
How to Break Bad Trading Habits and Follow Your Rules
3 Psychological Quirks That Can Affect Your Trading
How to Develop a "Trading Brain"
Value Trap Definition
Positive Mental Qualities of Successful Traders
Herd Instinct
Removing the Barriers to Successful Investing
What Is Hindsight Bias?
The businessman who confirms the stock prices
Media Effect
Hand of a stockbroker buying and selling shares online
The Principles of Behavioral Finance
Solvency Cone
Office Building
Confirmation Bias Definition
Chasing money
Sunk Cost Trap Definition
Financial Figures on Screens
What Is Regret Theory?
Scale In
Positive Feedback Definition
Midsection Businessmen Analyzing Charts on Laptop in Office
What Is Regret Avoidance?
What Is Analysis Paralysis?
Cutoff Point
financial data board containing numbers and arrows
Net Order Imbalance Indicator (NOII)
Pivotal See Saw 2 - REQUEST
Understanding a Fulcrum Point
What Is Hammering by Stock Traders?
What Does "Hot Hand" Mean?
Home Country Bias
Fighting the Tape
Wallflower
What is a Bid Whacker?
Sunshine Trade
Hand arranging wood block stacking as step stair on paper pink background. Business concept growth success process, copy space.
In The Pink
An empty box with a spring launching the word preview
What Is a Teaser Document?
New York Stock exchange and the street in front of it
False Market
Up Arrow
Let Your Profits Run Definition
A graphic containing a human head with another human smashing a bubble over it with a crack and lightning into the head
How Cognitive Bias Affects Your Business
6 Steps To Thinking Like A Stock-Market High Roller
Casino Stats: Why Gamblers Rarely Win