Trading Psychology

Trading Psychology Overview

11 min read
Trading Psychology

Trading psychology is the emotional side of investors’ or traders’ reasoning for buying and selling securities. There are two fundamental aspects to trading: the technical and the emotional. Unfortunately, many traders aren’t self-reflective and focus on learning more about their trading strategy rather than looking inside themselves when times get tough. One of the biggest reasons why traders fail is because they focus too much on learning more skills to trade rather than improving their emotional state of mind.

Trading Psychology Basics

One of the hardest things to do in life, not just in trading, is to look in the mirror. To do a good self-evaluation of where we are at in our lives. What are our strengths and weaknesses? Many people want to focus on their positives while ignoring behaviors that can harm them.

Trading psychology isn’t really about trading. It’s simply about psychology itself. Trading is just a skill, hobby, or profession, but it’s not the root of the problem. The root of most traders’ failures is something other than learning more patterns or technicals. It’s about looking in the mirror and being honest about what they need to change about themselves internally.

Building Trading Psychology

Another reason traders fail is that they think the market is out to get them, which is false. The stock market is a collection of traders making buying and selling decisions. No big evil monster called “the market” is out to get you. This may sound funny. However, many cynical traders think this way. The reality is it’s most likely their emotional state holding them back. If you need more help with trading, then take our courses.

  • Strengths and weaknesses – a trader should identify their positive and negative character traits.
  • Trading strategy – a trader should choose a trading strategy that matches their personality trades
  • Trading Plan – A trader should create a trading plan that is conducive to their personality and strategy.
  • Tracking – traders need to track their wins and losses in a trading journal to see how they progress
  • Get help – traders should never feel shame if they need emotional help or decide trading isn’t for them.
Trading Psychology

Pride comes before the fall!

Per Zippia, the trading industry is heavily male-dominated—84.5% men and 15.5% women. And I will call it as I see it: men are prideful. Not all men, obviously, but it’s our thing. 

  • I can do it…
  • I’m fine…
  • Nothing’s wrong…
  • It wasn’t my fault…
  • I’ll fix it…

Does any of this sound familiar? Unfortunately, many men think they can use the same old song and dance when it comes to trading, and this is where they fall flat on their faces. And guess what? Instead of looking in the mirror when they fail as traders, they usually blame the market or have some other convenient excuse.

The truth is, they probably needed some emotional help. Maybe they needed medication for stress and anxiety. Or maybe they needed healing from childhood wounds, gambling addictions, alcoholism, drugs, ADHD, OCD, bipolar, autism, Asperger’s, or other serious psychological issues.

Trading Psychology Emotions

Traders are affected by two predominant emotions when making decisions: fear and greed. Depending on the trader’s control, these emotions can have positive and negative effects. The trading industry, unfortunately, has a history of “trading gurus” that prey on the emotions of other traders. Sadly, these “gurus” often use trading psychology against their members or followers.

Bitcoin pumpers, pot stock pumpers, $AMC and $GME pumpers, and the numerous SEC fines imposed on other trading companies over the years have created quite the buzz in the industry. It’s wild how some of these people can have some emotional skills to get rich yet lack certain emotional skills to be good people.

Sorry, I just went on a quick rant focusing on other people, but now I’m back to focusing on you, haha.

Trading is hard and risky, and I care about your emotional well-being, not just as a trader. I’m passionate about psychology and how people work. The term “trading psychology” triggers me because I want to scream that everything is about psychology. So, can we remove the word trading and get to the heart of things?

You bring YOU with you

Trading is like anything else in life. We bring our struggles with us. When push comes to shove and trading gets hard, we tend to resort to the blame game or compartmentalizing.

The compartmentalization game is what sets us up for the fall as traders. So why do we think our problems won’t follow us into the trading world? First, you can’t avoid yourself! You don’t magically disappear when making trading decisions.

Trading is one of the world’s hardest and most pressure-filled professions and requires the best emotional health possible from each of us. Making split-second trading decisions with money on the line is not for the faint of heart. Just that alone is hard, never mind bringing our life baggage in.

I’m sorry if this trading psychology rant seems harsh. I’m just trying to be real with you. Sadly, you often won’t see this truth in the industry. But, again, many broken people hide behind their masks. And yes…most of them are men. Even the successful traders. They’ve got their baggage too. 

Slap dat ASK!

Are you ready to push dem keys and slap dat ask? No, I’m not a perv, haha. Hotkeys! Are you ready to press a button and get in and out of a trade within seconds? Think about all of that adrenaline. 

Are you ready to fat finger a trade, hit the sell button by accident, and end up short on a parabolic runner? Then, having to cover your position for a $5,000 loss? Sounds like fun, right? If not, maybe day trading isn’t for you, then?

How about being up $1,000 profit on an options trade, then going to sell and can’t? Your broker is having “issues” at the time and won’t fill your order. You panic and check their Twitter account and see some generic response saying they are having an outage. Thirty minutes later, you hear a ding on your broker platform and are like, WTF?! Your broker filled your order for a $500 loss.

Does this stuff sound crazy? Welcome to the world of trading! Anything can and will happen, and you must be prepared for it.

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How Do You Control Your Emotions When Trading?

  • Have a proven trading strategy that’s tailored to your emotional state
  • Focus on trade setups with a 1:4 risk/reward ratio
  • Do not trade with more money than you are willing to risk
  • Be willing to walk away and not trade if your setup isn’t there
  • Track your trades in a journal and improve your trading weaknesses over time

Focus on your strengths

A trader can be affected psychologically when making important trading decisions. Emotions can sometimes cloud their judgment, and that’s where having a proven trading plan is important. Also, having pre-determined risk management principles in place before entering a trade can help a trader make decisions with a clear head.

I’ve hammered on men’s weaknesses, and now I will focus on our strengths (again, ladies, you can listen in). Men like being in control of situations and not dealing with any BS. They also tend to be analytical thinkers and less emotional. These character traits can be good qualities in a trader, which I’ll get into.

What's your plan?

Here’s the deal. There isn’t some magic trading psychology formula that will make you a good trader. Yes, it’s important to study and learn how to trade. That’s a given. I’m not going to sugar-coat it. It takes a while for most people to develop their trading plan; statistically, most people never make it. You’ll see that I have yet to talk about what to trade or the skills on how to do it here because I’m trying to connect with you on a deeper level. 

It’s not about trading; it’s about you. If I’ve scared you off from becoming a trader, then maybe that’s a good thing. Trading isn’t for everybody. That’s not some cavalier statement; it’s just the truth. Sadly, many people find out too late that trading wasn’t for them, and they should have quit before they even started.

What Qualities Make a Good Trader?

  • Self-reflective – understands their strengths and weaknesses and is honest with themselves.
  • Calm – doesn’t get affected when trades go against them and pick themselves back up.
  • Determined – they are committed to correcting their decisions if they have a bad trading day.
  • Realistic – they have realistic expectations on profit target levels and what to expect from the market.
  • Passionate – are excited about trading as a career and looking forward to each trading day.
  • In control – they realize that they control every trading decision they make.
  • Level-headed – they don’t believe the market is out to get them when trades go against them.
  • Motivated – they are motivated to do something good with their trading profits.
  • Responsible – are good stewards of their money and make solid financial decisions.
  • Confident – they know they will do well if they follow their proven trading strategy.

It’s important to have an analytical and methodical mindset when trading. Technical analysis helps a trader focus on the trade at hand because they pay attention to what the security is doing on the charts rather than listening to the emotional bias of others. No one can make trading decisions for you. You are in control of your destiny as a trader. 

Final Thoughts: Trading Psychology

Sometimes, we must face a crossroads and have our come-to-Jesus moment. Have you done that good self-reflection yet? Do you have the intellectual honesty to say you’ve thought this trading game through?

And honestly…who cares about trading right now? So what’s your plan for you? Do you need some help with the stuff you’re dealing with? Listen, I get it. I’ve been there a million times, but the baggage never leaves until we get help, and trading is no different. 

The stakes get much higher because we carry our baggage into the trading arena, which is full of people with an addiction and broken people. People who are selfish, in the game for themselves, and don’t have our best interests at heart. People that you chew you up and spit you out without giving it a second thought.

It takes a gladiator to make it as a trader. In the end, you’ll be beaten, bloodied, and battered if you make it. Chances are you’ll be alone, with little support. People will think you are crazy for doing it; honestly, it is wild at times. You’ve chosen one of the hardest career paths in the world, should you continue. However, if you can learn to enjoy the hard work and process of growth as a trader, trading might be the right for you.

In the words of the great Hyman Roth in The Godfather: Part II, “This is the business we’ve chosen.”

Picture of Lucien Bechard
Lucien Bechard

Please PayPal me $500 for reading this post. That's my going rate as a trading psychologist. PS - I'm not really a psychologist. I just play one on the internet...

Frequently Asked Questions

Trading psychology is about the emotions and thoughts affecting a trader's decisions. It includes feelings like fear, greed, euphoria, and panic, which can influence how traders buy and sell. Managing trading psychology is important because it helps them avoid making irrational and impulsive decisions. This is key to achieving consistent gains and overall long-term financial goals.

So you don't fall victim to your emotions and panic buy or sell, it's important to put some guidelines or rules in place. A good start would be implementing the following:

  1. Create a Trading Plan
  2. Set strict limits on how long you trade each day
  3. Set % loss for the day and stick to it
  4. Practice, practice, practice in a simulator before you put real money on the line
  5. Use a Take Profit and a Stop Loss
  6. Backtest Your Trading Strategy
  7. Join Bullish Bears to help you on your trading journey

Trait theory, also known as dispositional theory, approaches the study of human personality in psychology. Trait theorists' primary focus is to measure traits, which refer to habitual patterns of behaviour, thought, and emotion.

Stock trading behavior refers to the actions, decisions, and attitudes exhibited by investors in the stock market. Individual trading behavior varies greatly. Additionally, personal risk tolerance, style, decision-making processes, and emotional responses to market fluctuations will all impact the trades one makes. 

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