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.