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Understanding the importance of trading psychology
Laura Wagg
July 17, 2020
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Discover how psychology impacts your trading and make an action plan to improve your mindset.
As traders, the right psychological approach is essential to success. Learn about the psychology behind trading, why it matters, and how to improve your own trading mentality.

What is trading psychology?
Trading psychology refers to the mindset of a trader while speculating on financial markets. This encompasses the thoughts and emotions that a trader experiences, which can be complex and far-reaching. As a trader, your psychology and the way you’re feeling can contribute towards you winning or losing trades. Emotions could cause you to trade riskily and erratically, instead of sensibly and strategically.

The key contributors to trading psychology
Various factors affect trading psychology. These can be summed up in four categories:

Personality and characteristics are unique traits that can affect the way we react to market movements. Some people might be stubborn; others may be naturally indecisive.

Emotional responses are caused by chemical changes. We can't avoid our emotions but we can learn to recognize them and choose not to act on them impulsively.

Behavioral biases can inhibit decision-making, getting in the way of fact. They can cause people to base decisions on assumptions or emotions.

Social pressure can cause traders to act irrationally out of a 'fear of missing out' or 'herd mentality'. Other people's actions can affect our decisions more than we might realize.

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Your own trading psychology will be made up of various aspects from each category. While you might have traits in common with other traders, your psychological makeup is entirely unique to you.

Why do you need to understand trading psychology?
You need to understand trading psychology because it affects your trades and can directly impact outcomes. Our minds are inherently complex places, and thoughts can influence actions, so your own psychology should be a fundamental consideration when defining your strategy. If you take the time to learn about the psychological elements that inform trading, you can begin to understand how to draw on those that will benefit you, and how to eliminate negative emotions to trade more objectively.
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