Why is psychology important in trading?

Stock and bond markets are fundamentally groups of people all trying to make decisions with incomplete information. Understanding psychology can be key to learning the way decisions are made. How do you be emotionless while trading? What is trading psychology? What cognitive biases undermine traders?

What is bad trading psychology?

This psychological side of trading is often overlooked. A sound state of mind means a trader executes his plan consistently, is mindful of the risks involved, is not hindered by emotions, takes equal responsibility for wins and losses and is realistic about trading in general. Bad trading psychology isone of the top reasons traders fail.

How does market psychology affect stock prices?

Technical analysis focuses on the trends, patterns, and other indicators that drive the prices of a stock higher or lower. Market psychology is one of those drivers. The trend-following quantitative trading strategies employed by hedge funds are an example of investing techniques that rely in part on taking advantage of shifts in market psychology.

What is optimal trading psychology?

From this perspective, optimal trading psychology incorporates a third dimension, besides the ability to avoid problem patterns and maximize mindsets associated with optimal functioning. This third dimension is the ability to translate our patterns of failure and success into concrete principles that guide our actions .