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Trading is as much a mental game as it is one of numbers. That’s why it helps to learn as much as possible about trading psychology. The more you understand your own emotions and motivations, the better you’ll be able to make solid investing decisions. 

Consider this a crash course in the way your mind works. What is trading psychology, and how can you learn to be a better trader?

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Trading Psychology 101

Trading psychology refers to the mental and emotional processes that influence a trader’s decisions. Essentially, the concept involves the inner motivations behind your most critical decisions. 

While it may be a bit of an oversimplification, most experts would agree that the two biggest motivators for traders are fear and greed. Here’s how these two factors might impact your trading strategy.


Fear can be a powerful motivator. The fear of losing might make you more cautious about approaching risk, or it may prompt you to jettison an underperforming stock in an effort to cut your losses. 

Fear therefore plays a powerful role in your posture toward risk. In some cases, it can also cause you to miss valuable opportunities. Alternatively, the fear of missing out on a potential gain can influence you to take on high-risk investments.


Greed can be a negative trait, to be certain. But in the context of trading, it simply means that you’re motivated by the prospect of major “wins.” 

Greed might prompt you to chase after that hot new startup, hoping to ride the wave of its success to your own advantage. However, if fear keeps investors from taking the right risks, greed can nudge investors toward snap judgments and decisions based on optimism more than solid investing data. 

Keep in mind, too, that both greed and fear are deeply wired in our brains. Stress can trigger the amygdala, the part of the brain responsible for emotions. That’s why we tend to make decisions based on feelings rather than facts. 

Additionally, a “win” can trigger the release of the reward hormone dopamine. This explains why some investors chase the rush of big gains — and not always rationally.

Trading Psychology and Investor Biases

The interplay between fear and greed has a direct impact on the way you handle risk and make investing decisions. But another critical area of investor psychology has to do with the concept of cognitive biases. 

A bias can be based on emotion, distortions of certain facts, or an overreliance on one source of information. Here are just some of the more common biases that investors and day traders may face.

Availability Bias

The availability bias refers to the tendency to make decisions based on the most readily available information, usually the most recent data. Instead, investors should learn to look at the big picture, making decisions based on historical as well as recent analyses.

Anchoring Bias

Some investors may fall victim to the anchoring bias. This means latching onto one piece of data and using it to influence the rest of your decisions. For instance, you might anchor your choices based on an initial stock price while neglecting the volatility that’s been seen in an asset because the initial price was recorded.

Confirmation Bias

A confirmation bias means that you’ve already made up your mind about a particular stock or investing decision. You therefore are quick to believe facts that support your viewpoint and to disregard data that points in the opposite direction. 

A related concept is motivated reasoning. This means that you’re more likely to believe data that supports the conclusion you desire.

Loss Aversion Bias

No one likes to lose. But in the loss aversion bias, investors deliberately hold onto underperforming stocks for far too long out of fear that they’ll lose even more. Alternatively, the same bias can cause traders to sell winning positions prematurely out of fear that the price may reverse.

Optimism/Pessimism Bias

The optimism and pessimism biases are just two sides of the same coin. Each bias refers to the way a recent gain or loss will skew future decisions. For instance, a recent loss may cause traders to be more timid in future decisions — a clear example of the pessimism bias. 

Overconfidence Bias

The overconfidence bias is exactly what it sounds like. Traders who are too confident in their own abilities may take on more risk than they can effectively manage, which can lead to catastrophic losses.

Leveraging Psychology to Day Trade Like a Pro

The secret to investing isn’t ignoring your emotions or biases but becoming more aware of them. Only then can you overcome your own psychology and make wise choices. If you want to learn how to day trade for a living, try these basic tips.

Understand Your Triggers

First, clearly identify the types of developments that set off your fear or greed response. This can help you keep your emotions in check and avoid making snap decisions.

Stick to Your Plan

Develop a clear trading strategy — and stick to it. That way, your strategy can serve as your guide even when you’re facing circumstances that might trigger your emotions.

Set Realistic Expectations

As a day trader, you’re bound to win some and lose some. Setting the bar too high can lead to massive disappointment, or it may encourage you to chase after risky opportunities.

Rely on Objective Data

Day trading often requires you to make fast decisions, but that doesn’t mean those decisions need to be uninformed. Learn as much as you can about the investments you make or plan to make so that every choice is based on objective data and not your “gut feeling.”

Take Advice Sparingly

It’s important to listen to what the experts are saying, but don’t just jump at the latest stock tip. Instead, perform due diligence so that you understand the data and trends that govern each decision you make.

Continue Learning

Always seek to continue learning and honing your strategy. If need be, take temporary breaks from day trading to reflect on your wins and losses and adjust your strategy accordingly.

Best Books on Trading Psychology

Do you want to learn more about investing psychology? Check out some of these popular resources.

Market Mind Games

You might start with Denise Shull’s Market Mind Games: A Radical Psychology of Investing, Trading and Risk. This work takes a thorough look at trading psychology while offering practical tips for traders.

Trading in the Zone

Mark Douglas’s Trading in the Zone: Master the Market with Confidence with Discipline, and a Winning Attitude focuses on the mindset needed for trading success. This makes the book highly practical for beginners who wish to master an effective trading mindset.

Trading Psychology 2.0

Brett N. Steenbarger’s Trading Psychology 2.0: From Best Practices to Best Processes is one of the most practical resources available today. Use this book to jump-start your trading strategies based on the latest and best psychological insights.

Best Loser Wins

Tom Hougaard’s Best Loser Wins: Why Normal Thinking Never Wins is easily the most unique selection on this list. It can be a great resource for those wanting to think outside the box when developing an effective trading strategy.

The Daily Trading Coach

For a direct approach, try The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist by Brett Steenbarger. These daily lessons will sharpen your understanding of trading psychology and improve your day trading strategy.

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