What is Trading Psychology?

Trading psychology refers to the mental and emotional factors that influence trading decisions. Fear, greed, overconfidence, impatience, and the desire to recover losses are some common emotions that can influence how a trader interprets market information and follows a trading plan.

Besides, SEBI also mentions some more behavioural biases, such as optimism, confirmation bias, anchoring, and FOMO (Fear of Missing Out) as factors that can affect investor decision-making.

How to Control Emotions in Trading?

Ideally, the focus should be on creating a trading plan that specifies the entry and exit conditions, position sizing, and risk limits. Additionally, the following trading psychology tips may be followed:

• Avoid increasing exposure solely to recover losses.
• Separate individual trade outcomes from the quality of the decision.
• Maintain a record of trades (via a trading journal) and note down the reasoning behind them.
• Take a break when emotional reactions begin influencing decisions.

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