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
Entering because a move is already happening rather than because a plan said to. It is the most expensive common error 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
Memory reconstructs past decisions to fit what happened afterwards. A contemporaneous record is the only defence, and it is the only route to knowing what a method actually does.
Anchoring
An arbitrary number influences a subsequent judgement. 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.