Trading Psychology
11 articles · 4 glossary terms
The documented biases that cost money, and the process habits that blunt them.
Foundations
Start here if the subject is new.FOMO and Chasing
FOMO (fear of missing out) is entering because a move is already happening rather than because a plan said to. It is one of the most expensive common errors because it systematically buys the worst prices.
Loss Aversion and the Disposition Effect
Losses are felt more intensely than equivalent gains. The documented consequence is selling winners early and holding losers too long, which is the opposite of what the arithmetic wants.
Keeping a Journal
A trading journal records each decision when it is made: the reason, the plan, the size and the result. Memory rewrites past decisions to fit outcomes, so a contemporaneous record is the only reliable review.
Anchoring
An arbitrary number influences a subsequent judgment. In markets the anchor is usually a price, and the most common one is what you paid.
Recency
Recent events are weighted more heavily than their frequency warrants. It is why risk feels lowest after a long calm period and highest after a decline.
Herding
Following what others are doing. It is frequently rational for the individual and produces outcomes that are collectively poor.
Overconfidence
Estimates that are too precise and abilities that are rated too highly. It shows up in trading as too much activity and too little diversification.
Regret Aversion
Avoiding decisions that could produce regret, which biases toward inaction and toward doing what everyone else did.
Intermediate
Assumes the foundations above.Confirmation Bias
Seeking and believing evidence that supports a position already held. In markets it is amplified by the sheer volume of evidence available on every side.
Overtrading
Taking more positions than a method supports. Costs scale linearly with frequency while edge does not, so activity beyond a point is a direct transfer of capital to costs.
Process and Outcome
In any domain with substantial randomness, a good decision can produce a bad result and vice versa. Judging decisions by their outcomes teaches the wrong lesson at exactly the wrong moment.
Terms Defined in This Subject
Open one for its definition, and the article that explains it in full.
Frequently Asked Questions
What is FOMO in trading?
FOMO, the fear of missing out, is entering a trade because a move is already happening rather than because a plan called for it. A stock usually becomes noticeable after it has moved, so acting on that attention alone tends to buy late and at worse prices, which makes it one of the most expensive common errors.
Read the full article: FOMO and ChasingWhy do traders hold losing positions too long?
Loss aversion: a loss is felt roughly twice as strongly as a gain of the same size. That makes realizing a loss painful, so losing positions are held in the hope of getting back to even while winners are sold early to lock in the feeling of a gain. The pattern is documented as the disposition effect.
Read the full article: Loss Aversion and the Disposition EffectWhat should a trading journal include?
A trading journal records each decision at the time it is made: the reason for the trade, the planned entry, stop and target, the position size, and what happened, along with notes on conditions and state of mind. Writing it before the outcome is known is what protects it from hindsight.
Read the full article: Keeping a Journal