Psychology of Trading: Enhancing Focus and Discipline for Successful Investing

Success in the stock market is a product of experience and knowledge. But even an experienced and knowledgeable trader can suffer losses if they fail to possess the right frame of mind.

Trading psychology is just as important as book learning or hands-on experience regarding success. We as human beings are prone to biases—investors, traders, and individuals are prone to cognitive and emotional biases and heuristics that affect investment decisions.

What Is Trading Psychology?

Each of these factors influences trading decisions, and a trader who can control them can use trading psychology in his favor. There are two attitudes and four emotions that comprise trading psychology.

Attitudes

1. Discipline
2. Risk aversion or risk acceptance

Emotions

1. Greed
2. Fear
3. Hope
4. Regret

» New to trading? See our guide to stock trading for beginners

Common Trading Psychology Mistakes

A mind is a terrible thing to waste. Yet, some investors can't master the psychology of trading, leading to some of the most common trading mistakes.

1. Emotional Trading Decisions

Effective investment strategies should emanate from careful analysis, not emotional impulses. Nevertheless, many traders fall into the trap of making decisions based on emotional triggers. Fear of Missing Out (FOMO) isn’t just a problem for teenagers; even investors sometimes fall prey to the herd mentality and make decisions based on this fear. Blindly following the masses rather than a careful strategy can leave traders in unfavorable positions, like buying shares of a stock that has already peaked.



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2. Overtrading

Individual traders and brokers can fall into the trap of overtrading. Buying and selling excessive stock can be dangerous for both. Brokers can attract the ire of the Securities and Exchange Commission (SEC) because overtrading in a customer’s account to generate commissions falls under the definition of manipulative and deceptive conduct. Individual traders who indulge in overtrading on their own account may not draw censure, but this scattershot approach rarely pays any dividends over the long run.

» Interested in currency trading? Take a look at our top forex trading tips

3. Revenge Trading

Like overtrading, revenge trading is a scenario where an investor attempts to recoup losses by upping the risks they take on their trades. Suffering a significant loss could alter a trader’s sense of risk management, prompting them to open up new positions without any overarching strategy.