#TradingPsychology Trading psychology is the emotional component of an investor's decision-making process, which may help explain why some decisions appear more rational than others.

Trading psychology is characterized primarily by the influence of both greed and fear.

Greed drives decisions that might be too risky.

Fear drives decisions that might avoid risk and generate little return.

Behavioral finance has documented several psychological biases and errors involved when making trading or investment decisions.

Understanding Trading Psychology

Trading psychology can be associated with a few specific emotions and behaviors that are often catalysts for market trading. Conventional characterizations of emotionally driven behavior in markets ascribe most emotional trading to either greed or fear.

Greed can be thought of as an excessive desire for wealth, so extreme that it sometimes clouds rationality and judgment. Greed can lead traders toward a variety of suboptimal behaviors. This may include making high-risk trades, buying shares of an untested company or technology just because it is going up in price rapidly, or buying shares without researching the underlying investment.

Additionally, greed may inspire investors to stay in profitable trades longer than is advisable to squeeze out extra profits or to take on large speculative positions. Greed is most apparent in the final phase of bull markets when speculation runs rampant and investors throw caution to the wind.

Conversely, fear causes traders to close out positions prematurely or to refrain from taking on risk because of concern about significant losses. Fear is palpable during bear markets, and it is a potent emotion that can cause traders and investors to act irrationally in their haste to exit the market. Fear often morphs into panic, which generally causes significant selloffs in the market from panic selling.

Regret may cause a trader to get into a trade after initially missing out on it because the stock moved too fast.