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Trading psychology refers to the mental and emotional components of the decision making process in trading. It represents the parts of a trader’s personality and behaviours that impact trading outcomes.
Notably, there are many ways in which these aspects of one’s character are exhibited, be it through fear, greed, arrogance and even hope. But of the four emotions, fear and greed are considered to have a primary influence on trading psychology, particularly in regard to risk taking and discipline.
Being too greedy may lead to decisions that are considered overly risky. Being too scared can result in missed opportunities or hindered trading with little capital gain. Developing self-awareness is likely to help a trader identify recurring negative behavioural patterns and the way they cloud sound judgement.
This enables the trader to address the behaviours to ensure objectivity and rational trading decisions.
The study of trading psychology looks at the reasons behind traders making potentially foolish decisions in the market or pertinent to other financial matters. Behavioural finance in particular melds psychology and finance to investigate the impact of human behaviour on financial choices and trading outcomes.
In other words, it identifies psychological influences and biases that drive trader and financial practitioner behaviour and explores how this behaviour can affect market outcomes. Behavioural finance is also examined to gain a better understanding of different outcomes across a range of sectors and industries.
Additionally, behavioural finance proposes that financial participants are not entirely rational or perfectly self-controlled. Instead, they are influenced by psychological factors, and possess relatively normal, self-controlling tendencies. Behavioural finance also purports that decision making in the context of finance is driven by one’s mental and physical wellbeing.
In other words, one’s mental state fluctuates based on the level of their overall health. Some of the most common behavioural biases include overconfidence, herd behaviour, mental accounting, emotional gap, anchoring, self-attribution, and loss aversion.
Another popular term falling within the scope of trading psychology is emotional trading (or emotional investing). Similar to behavioural finance, emotional trading refers to behavioural impulses triggered by market volatilities, resulting in emotional buying or selling of assets.
Emotional trading can be influenced by a range of emotions, like panic, greed, excitement, fear and even overconfidence.
Some common examples of emotional trading decisions include overtrading, panic selling, confirmation bias, and others. Getting a handle on emotional trading requires emotional intelligence to maintain discipline and manage psychological stressors.
Engaging in ongoing learning and investing in personal development will help a trader acquire vital skills like self-regulation, empathy, and confidence.
An additional key aspect of trading psychology is the concept of trading instincts, i.e., the intuitive or gut feelings that traders may experience when making decisions in financial markets.
Trusting one’s instincts however comes with a robust self-awareness and having the ability to separate a legitimate, rational decision from one driven by emotional impulse. It’s realising that one’s objectivity may be skewed or clouded by bias and taking the steps to rectify the problem.
Three of the most common psychological phenomena impacting rational decision making includes sensory-derived bias (forming an opinion on potentially biased information), avoiding the vague (fear of the unknown), and tangibility of anticipation (when the feeling of anticipation becomes the focus, instead of achieving what is being anticipated in the first place).
T4Trade, with registered address of F20, 1st Floor, Eden Plaza, Eden Island, Seychelles, is a trade name of Tradeco Limited.
The Group includes Damadah Holding Limited with registered address at 365, Agiou Andreou, Efstathiou Court, 2nd Floor, Flat 201, 3035 Limassol, Cyprus.
Tradeco Limited is authorised and regulated by the Seychelles Financial Services Authority with licence number SD029.
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T4Trade is not targeted to residents of the EU where it is not licensed. T4Trade does not offer its services to residents of certain jurisdictions such as USA, Iran, Cuba, Sudan, Syria and North Korea.
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