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Being aware of the various trader mindsets can help ensure your decisions are fact based and objectively reasoned. Without understanding this mindset, you’ll be exposing yourself to various emotional and cognitive biases that could harm you financially.

Improve your ability to trade effectively and profitably by reading our complete guide to trader psychology.

Defining Trader Psychology

Psychology according to the APA is the “understanding of human emotion, personality, intelligence, memory, perception, cognition, attention, and motivation”. In the context of trading, it’s the application of this understanding of psychology to explain trading decisions made by market participants.

Emotions, biases, and irrational reasoning are all very human and very present factors that can affect all manner of decisions, including financial trading ones. Trader psychology can substantially affect the ability of a trader to profit and their exposure to risk or loss.

Emotional Factors

Every individual is different and unique. In the same way, every trader is influenced by a complex combination of emotions.

Impatience

We can all be impatient from time to time but when it comes to trading, your impatience can shoot you in the foot. Impatient trading can cause rash decisions to be made based only on attempted short term gains without properly understanding the long term effects and trends.

Fear

Fear is an all-too-human emotion but can be debilitating for a trader. Fear of loss or fear of missing out can badly inform decisions and motivate trades to be made without proper consideration and deliberation.

Happiness

Happiness is a positive emotion in just about every scenario. However, emotion is not a responsible determinant of trading actions including happiness. Being happy can misinform understandings of markets and cause incorrect decisions to be made based on the elation of previous wins or a feeling of “luckiness”.

Pride

Pride truly does come before the fall. When a trader prioritises their pride and ego over making smart trading decisions, costly mistakes can be made. Keeping your humility while trading is important in avoiding silly and preventable mistakes.

Anger

Anger is an important factor in understanding financial and forex trader psychology. Uncontrolled anger can cause decisions to be rashly made without the necessary level-headedness and patience to make informed, smart financial decisions.

Cognitive Bias Factors

We’re all subject to biases in all aspects of life. In general, a bias is a predisposition to a certain type of thinking without taking into account objective facts or information. It’s vital you’re familiar with the various types of trading biases so that you can concentrate on mitigating their effect on your ability to conduct rigorous market analysis.

Gambler’s Fallacy

As its name suggests, the gambler’s fallacy is a famous bias that pushes gamblers to believe that a ‘winning streak’ will continue. This logical fallacy can cause substantial profits to be lost by ill-informed trading decisions by people who feel like they’re on a profitable streak.

Sunk Cost Fallacy

The sunk cost fallacy is the psychological phenomenon that convinces you to “double down” in an attempt to make back losses through a future, increased windfall. In trader psychology, this can be the stubborn continuation of incorrect trading techniques or strategies that will snowball loses over time.

Negativity

Sometimes this can be classified as ‘pessimism’. It’s the bias that causes individuals to focus on the negative aspects of a trade rather than acknowledge and consider the positive aspects to better inform future trades.

Change Resistance

Those individuals are biased towards favouring tried and tested status quo trading strategies over innovative and new methods of trading. Being change resistant can prevent you from being necessarily flexible and adaptable to changes.

Confirmation Bias

In trader psychology, confirmation bias can be described as the looking for information that reinforces one’s previously held opinion or view. In trading, this sort of pre-set mindset can be detrimental in making informed and objective decisions.

Representative Bias

This bias is the cognitive shortcut to simply repeat previously successful strategies and methods without considering or analysing the necessary factors and changes. Each trade needs to be informed and considered free of biases.

How to improve your trader mindset

The best way to improve your trader psychology to make the most of your trading decisions is by understanding the emotions and biases that affect your decisions.

Admitting you have a problem is the well-known first step towards solving an issue. Once you know what factors are impacting your ability to make rational decisions you can make headway in combating these affects. Here are a couple of tips and tricks to avoiding the pitfalls of trader psychology.

Know Thyself

Understanding whether you’re a naturally pessimistic person or an intuitively confident individual, as just two examples, can help you counteract the basic, underlying personality traits that will prevent you from taking the right trading positions.

Stick to the Plan

Once you’ve developed a trading strategy, it’s vital you stick to it regardless of your cognitive biases, impatience or negativity. Sticking to the plan will help keep you level headed and on track to achieving your goals.

Develop Adaptability & Patience

These positive trader psychology traits will also help you succeed in other areas in life. Focusing on improving your ability to adapt to changing information and factors, and improving your patience will help you stay steadfast throughout market storms and volatility.

Don’t Trade Straight After a Loss

Everyone loses sometimes. Ensuring you don’t make a decision out of anger or impatience is absolutely pivotal for professional and profitable trading over the long term. If you make a loss, give yourself a break.

Track Your Trading

Information is the key to trading, both of the market and of your own performance. The better you track your trading, the better you’ll be able to identify your mistakes and where your trader mindset failed you for future improvement.

Keep Learning

We never stop learning. Keep researching and developing your skills and knowledge to help counteract the negative effects of human psychology. Seek out experts and knowledgeable traders so you can learn from others who also experience similar psychological failings, and have overcome them.

Let’s talk some more

If you’re still serious about profitable forex trading, CFD trading, or financial trading in general, we’d love to continue the conversation about trader psychology and how to best insulate yourself from bad decisions and bad trading outcomes.

Want to talk more too? Get in touch with our team today!