9 Ways To Improve Results Through Trading Psychology

Trading psychology plays a bigger role in our results than most new traders realize. Here are 9 ways psychology may be negatively affecting your trading, and what to do to fix it.
Updated: Sep 26, 2022

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Maybe you have read lots of books, even practiced trading in a demo account and did well, but for some reason, you can’t seem to make money (or are losing money) when trading for real. The culprit isn’t always a lack of knowledge, often it is a matter of psychology.

Trading is about finding a strategy (or several) and then implementing them over and over again. The strategies are put into a trading plan that set investing guidelines for when and what you will trade, how you will manage risk, and how you will enter and exit positions. Once you have a trading plan, it may need to be revised as you gain more experience, but most of the heavy lifting is done. While it is possible to get bad information online or in books/courses, if you are still struggling a year into your trading journey (it typically takes the traders that become successful at least 6 to 12 months to start showing more consistent profits) more often than not lack of information is not the problem. How we think is.

Changing how we think, and being aware of mental traps nearly all of us fall into can help us better utilize the trading information and plan we already have. If you are struggling, hit the pause button on being an information junkie or a trading plan tinkerer. Take some time and consider these trading psychology pitfalls you may be falling into.

Here are nine ways your psychology is secretly affecting your trading.

Overexposure or Desensitization

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If you are reading through the following list and say to yourself “Yeah, yeah, I know all this” and then skip over it. That’s overexposure. It means you are desensitized to certain types of information. Most new traders go on an information binge when they start out. They read the same general things over and over again, such as make a trading plan, sticking to the plan, calculating the proper position size, only risk 1% of the account per trade, etc. This is all good advice, yet it is glanced over and discarded because traders view it as stuff they already know.

Don’t mistake knowing with being able to do it. If you are struggling, go back and actually work on the small things you are taking for granted.

It’s the things we are unwilling to admit we need to work on where the problem typically lies. I get lots of emails from people who have been trading for years but never had any success. They tell me their main issues and sometimes I look at a few of their trades. Almost always they have a decent strategy, but the simplest thing is wrong…and it is probably one of the first things they learned. Most of the time though, when I point it out, they dismiss it and continue looking for a complex solution to a simple problem. They have heard it before, so are desensitized to implementing the advice.

The people who improve tend to always check back in on their basics…no matter how long they have been trading and no matter how much knowledge/experience they have or think they have.

Loss Aversion

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Humans have a natural tendency to avoid loss. But losing is part of the trading game. To avoid losses people hold onto losing trades, or “freeze” when its time to the pull the trigger on a new trade. Both are versions of loss aversion. The person holding onto a losing trades doesn’t want to accept the loss they’re facing. The person who is afraid to get into trades or takes profits very quickly is afraid of potential losses or losing what little they have.

This issue stems from a psychological quirk we all have: our mind perceives losses as having twice the impact of a similar gain. Think about that for a second…the pain of losing your house far outweighs the joy you would feel in winning another house. Two houses are great. Nowhere to live is far worse. Going from $10,000 in your account to $20,000 is good, but going from $10,000 to $0 would likely bring up far stronger feelings! A loss takes away what you already have, and worked for, so losing feels more significant than a proportionate gain. This psychology affects everything, including all the trades we make.

If you want to trade, fully accept losses and cut them when your trading plan tells you to. Hanging on to a trade or hoping it will turn around is your mind tricking you into thinking a losing trade is a bigger deal than it actually is. Take the loss while it small and manageable. And take all the trades you are supposed to. If you have a solid and tested plan, any losses are reasonable and part of being a successful trader.

As long as your wins offset your losses, then there is no reason to fear losing trades. If you are losing money consistency, then there is a reason to be fearful. Use that fear to stop trading and improve your plan (or psychology). See How Much a Day Trader Can Make to see what’s possible even when losing almost half of your trades.

Excessive Evidence Seeking or Fear of Unknown

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This is an extension of loss aversion, except excessive evidence seeking or fear of the unknown usually plays a role before you take a trade. Pro traders have a system, and when a trade signal occurs they step in and trade. The novice wants lots of confirmation. They wait till late in a rally to buy, but by then most of the profits are gone and the trend reverses.

I am a trend trader, and many of my articles are on trend trading. This prompts many emails from readers asking “…but how do I know what the trend is going to do?”

You don’t. For me, an uptrend starts with an impulsive wave up that is bigger than the last impulsive wave down. I wait for a pullback, then a consolidation (usually, not always), and then when the price starts to rise again I buy. I don’t know what is going to happen, but over tens of thousands of trades I have found that it works more often than not. On any single trade I don’t know what will happen. I see the pattern and then embrace the unknown by taking a trade.

New traders like lots of indicators on their chart, thinking if more indicators align this provides more confirmation of what will happen. These traders fail to realize that many popular indicators have very similar calculations, which are using the same recent price history of the asset. Having 10 indicators probably won’t provide any more information than one or two.

Focus on few key things and that is it. When they tell you to trade, trade. Embrace the unknown, or don’t trade.

Lottery Syndrome

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Many people are affected by lottery syndrome; the desire for a windfall. Trading appeals to lottery ticket buyers because on any given day where is a stock exploding higher or lower, offering a big reward…if you could just find it and trade it correctly.

But trading isn’t like a lottery ticket. To make a big trade you have to trade it perfectly to extract the full amount, and that is never easy. Also, while it’s easy to find big moves in hindsight and think of ways you could have profited, in real time there are thousands of assets to choose from. Even if you pick the right asset, you have to pick the right few seconds to get in before a big move takes off…and you require liquidity to get in (someone else is always on the other side of a trade), fast execution and the foresight to understanding what is happening and ride the big move for a profit (which will include ups and downs along the way).

Have you ever seen those posts saying “If you bought $100 worth of XYZ back in 2012 you would up a million dollars”? Wow! But think about that for a second. If you were in that trade, your $100 would be worth $200, then $500, then maybe a $1000. At any point would you have been tempted to take that profit? What about at $10,000!? That’s a huge return already. You’ve made 100x your money; something that almost never happens. What about at $100,000? You could buy that luxury car you wanted, or make a big downpayment on a house. At $500,000? You don’t think life changing money, for most people, would have any effect on what you do with that trade?

Also, holding out until a million dollar profit would require some foresight or strategy for holding it that long. Certainly, it didn’t move from $100 to $1million in a straight line or over a brief time period. No, it likely took years. If you held till $10,000 you may have seen that profit dissipates to $5,000 or $2,000 before it moved back up. Those moves can be gut-wrenching for new traders, and make it very difficult to “win the lottery”.

The point is, getting lucky with a massive win is actually quite hard! It is astronomical odds to hit a huge win just by random luck. And without a well laid out and tested plan (which as discussed earlier usually 6-12 months to really get fine-tuned and working), hoping to strike it rich on one or two trades will require random luck.

When we factor in the psychology, the odds are almost zero that you will become a millionaire based on throwing out Hail-Mary trades. Yes, it does happen. We see stories about it happening, so we like to think it is possible. But for every trading lottery winner there tens of thousands of traders who will never catch that one massive trade. Availability bias is at work here. You see something so you believe it is possible, forgetting to consider how many people tried that same thing and didn’t succeed.

Avoid trading for the massive one-time win. You’ll be broke before you find it. Trade tendencies, and collect steady gains. While it is slower, it is far more realistic to become rich(er) over 10 years collecting regular profits, than swinging for the fences hoping for the lottery and having nothing to show for it after many years.

“Law” of Self-Consistency

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This is equivalent to “I do it because that is the way I have always done it.” Once we define ourselves in a certain way, we tend to stick to it. If you view yourself as a gambler, you’ll be a gambler, until you change your viewpoint of yourself as well as your actions.

Monitor yourself for thoughts and speech which relate you to your trading.

  • I am too scared.
  • I just can’t pull the trigger.
  • I never get out when I am supposed to.

Also, pay attention to any “should” or “shouldn’t” statements.

  • I should have a better plan.
  • I should be at my desk at least 15 minutes early to prepare for the day.
  • I shouldn’t interfere with my trades.

These are just a few examples. Knowing what we are doing wrong is a good first step in improving, but to actually improve you need to stop viewing yourself as that person making the mistake. Saying statements like those above is equivalent to throwing up your hands and declaring “That’s just who I am.”

But it isn’t! It’s just behavior, which you can change.

Should or shouldn’t statements are reflections of what needs to be altered, but said in a passive (not likely to change) way. If you should have a better plan, make a better plan. If you need to be at your desk earlier, there is no “should.” Just do it.

If you are afraid to pull the trigger on trades, focus not on your fear but on the benefits of taking the trade. Don’t think of yourself as fearful, start thinking of yourself as opportunity seeking. Someone who exploits their strategies with confidence. Fear of losing (or any other problem) isn’t going to go away if you keep reaffirming it. Focus on what you want to be/do instead of what you are currently doing.

Thrill Seeking

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Often, but not always, those that succumb to Lottery Syndrome are thrill seekers. They don’t want to put in the work of steady gains, they would rather chase the thrill of getting everything all at once.

Gamblers tend to be thrill seekers. They may want to be successful traders, but their real joy comes from the ups and downs. In this way, gaining consistency would be bad because that would take a lot of the fun out of it.

Another way people thrill seek is to constantly try something new. They are forever trying to recreate the initial thrill they had when they placed their first trade and probably didn’t know what they were doing. Constantly trying something new leaves them on the edge of their seat to see if it works out. Yet even if it does work, when the system hits its first rough patch they are off to try something else. Relationships are another avenue this type of thrill seeker pops up.

To the thrill seeker, consistency is doom. If subconsciously (or consciously) they are after thrills, they will continue to find ways to make their trading volatile to satisfy that need.

The thrill seeker is chasing something outside of themself to create a feeling inside. Good traders try to improve things inside themself. We can’t control how much money is floating around out there, but we can control what we do to get it by being consistent and following a plan that we work diligently on.

If you have an inner thrill seeker and you want to be a successful trader, find other activities for the thrill seeker to satisfy that need. As long as you chase thrills, instead of the more mundane task of just following a plan, you will not achieve your full potential. If thrill seekers do find success, it is often fleeting, with a strong chance they will give it all back.

Action Bias

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At most jobs, you get in trouble if you aren’t doing anything. When we are kids our parents tell us to go play or do something. Our minds are primed for always doing something. Most of us, that are healthy, feel a bit guilty if we lie in bed all day and do absolutely nothing. Even reading a book or watching Netflix is doing something.

In the real world an action bias can serve us, but in trading it can hurt us. If a certain amount of time has gone by and you haven’t taken a trade you may feel antsy. You feel like they should be doing something. So you look harder, or maybe you look at markets or time frames you don’t usually trade. You can probably see how this may be a problem.

Action bias propels us into action when no action is required. In the Thrill Seeking section above it was mentioned that trading is boring a lot of time. Sometimes nothing is worth trading, and we need to be okay with that. Taking action when there are no good opportunities means we are unnecessarily risking our capital on poor trades. Doing so means we may have less capital to use for the good opportunities that do come along.

By taking trades we know we shouldn’t, but feel compelled to take because of action bias, we also use mental energy. More than likely these poor trades won’t work out, and you can be certain you will be upset with yourself for unnecessarily taking trades of poor quality. Being upset with yourself or in a foul mood may affect other opportunities–we may not be as focused when the next opportunity arises, which could mean missing a good trade.

Trade when your plan tells you to trade. Enjoy the luxury of not having to do anything when there is no opportunities present. A good trader is a patient trader.

Short-Term Memory Bias

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Time has a way of dulling distance experiences, but recent events can be hard to forget. Short-term memory bias is when we let the outcome of recent trades affect our next trade. Assume you just took two losses in a row. It’s not a big deal in the whole scheme of things, and they may have even been great trades that just didn’t work out. But the two losses have you questioning your methods. Maybe you end up skipping the next trade, which of course ends of being a winner, or you’re nervous during the next trade so you end up making a mistake.

On the other hand, maybe you just had several wins a row. You feel invincible and no matter what you do you will win. Enjoy this feeling while it lasts, but don’t let it go to your head where you end up doing something stupid like risking too much.

A past trade should have no effect on future trades. The market doesn’t care if you just won, lost, or sat on the sidelines. It will keep on doing its business regardless.

Another way action bias affects us is with financial market conditions. If yesterday was volatile we often come into the next day with strong biases expecting another day like yesterday. We may expect a big move to come anytime, even though the financial market is moving quietly today. Similarly, if the price has been quiet the last few days and today there are huge moves, we often feel ill-equipped to adapt to the new environment. We are taking recent events and then forming expectations about what should happen today based on those pasts events. That may work sometimes, but not always. Be open to whatever the market is providing, instead of thinking today is going to be like yesterday.

Some ways to help quell this bias are:

  • Realize that any single trade doesn’t matter much. Win or lose, you will have loads of both in your career.
  • Keep risk on each trade relatively small. This means that one single loss or win isn’t going to make or break your career, but over many trades you will do well and keep risk managed.
  • Stay focused on the present. Don’t try to forget past trades, just involve yourself in analysis of current price action so you are taking new trades for what they are and not being biased by the past.
  • If you find yourself forming strong opinions during the day, take a step back and question whether this is hurting you. Strong opinions can blind us to other opportunities. If we think the price should go up we may keep fighting a downtrend and losing, while we could just trust what price is telling us and profit on the short side.

Availability Bias

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Availability bias is a huge topic but here are a couple ways it manifests:

  • You accumulate a lot of information on given topic so you believe what you found to be true, but your sources were skewed. For example, you Google search results of “successful traders” and find hundreds of them. You start to believe trading is easy because lots of people are successful at it. Another person Googles “why day trading is impossible”, finds hundreds of articles, and begins to believe day trading isn’t worth the effort. Neither belief is accurate, no matter how many articles are read on the given topic. The truth is somewhere in the middle…actually it is that lots of people lose and a few succeed.
  • Availability bias is also created by limited experience. Your friend just happens to be a successful trader, and that is all you have to go by. Since you don’t know a lot of people who have tried trading, and the one person you know who did is successful, you believe trading is easy. Another person knows 5 people who tried trading but none of them were successful. They don’t try trading because all examples they can think of are negative. Limited information and experience may lead to strong beliefs that aren’t accurate.

Until we get information from various sources, our perception will always be skewed based on what we have already seen/heard/experienced. Our perceptions may also be skewed by the question we originally sought to answer: “Does X work?” or “Does X not work?” No matter how much information we gather, until we look a wide range of experiences and views on both questions we will be no closer to finding a credible answer.

Fond or unpleasant experiences, including those that other people tell us about, can cause us to act (or not act) in a different way than if we were totally neutral to the situation.

You may buy a trading book, and start trading one of the strategies. You lose three trades in a row, think the book is worthless and go off looking for another book. You recall the three examples of losing trades and base a decision on that. But are those three experiences representative of what that strategy has to offer? Maybe it is, but maybe not. Over many experiences, or upon doing more in-depth research, we may find actual results are very different than our initial perceptions…or what other people told us.

In trading, we will have losing streaks. To stay the course and gain more consistency (which still includes lots of losing trades) you can’t trust small or skewed data samples. If I showed you 100 of my trades, you would see strings of wins and strings of several losses in a row. You would also see periods where it goes win, win, loss, win, win, loss, etcetera. If you take only 5 trades, you could randomly experience a string of wins, a string of losses, or a combination. If you trust the small data sample you will have a false perception of what 100 or 1000 trades can produce.

Here’s one more example. You will often hear people say “Let your winners run.” That seems like good advice, on the surface, and you have probably heard it often so it must be true. But that phrase can be destructive if you don’t have a plan for taking profits at some point. When you are in a trade that is starting to turn against you, “Let it run” may pop into your head and so you tell yourself you are going to hold on because that is what the pros say to do. But it is just a saying. It means nothing until you define what it means to YOU.

For me, I don’t usually let profits run. I take profits at levels established before the trade. I take my profits and can always get back in if the price is still moving well. I do let my profits run further than my losses, but my strategy tells me how to that, not a common phrase.

Notice any availability biases while you trade, and you may have to really think about it. These are typically the one-liners/beliefs (that you have never really questioned) that pop into your head causing you to deviate from your plan. Dig up those thoughts and beliefs and examine them, then discredit them with cold reason and calculation. Define how you will deal with the availability bias now that you know it is not serving you.

We are typically blinded by our own experiences until we open ourselves up to other possibilities. For more, see How Availability Bias Is Affecting Your Trading.

Final Word on Trading Psychology

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Have any other”psychology quirks” affected your trading? Share them, it’s nothing to be embarrassed about. We are all affected by our own psychology, but as traders, we need to understand and find ways to work with our psychology, not hide from it.

While we are all different, as the trading journey begins and you start to notice that maybe it isn’t your strategy that is the problem but the mind (this is usually quite an insight in and of itself), reach out to other traders and talk about it. There are online groups, comment threads, local trading chapters, or probably some other traders in your local area. Psychology is tricky because often we aren’t aware of our own biases, so having someone else–or a few people–to get feedback from really helps expose biases that may be hurting us. It also feels good to make some self-improvement strides.

We are human, so we will never be perfect or eliminate all our biases or psychological quirks (even if we automate our strategies). And perfection needn’t be our goal. Our purpose as traders is to control all these things just enough so that we can implement our plan well most of the time. We become balanced enough to know that sometimes we screw up. Let it go and keep pressing forward, sticking to your trading plan as much as possible. Improvement tends to occur over time, but there are always slips ups and room for improvement. And that is the fun part.

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