8.1 Understanding Trading Psychology

• Trading psychology = the mental and emotional state of a trader during trading.

• Influenced by beliefs, personality, past experiences, and emotional responses.

• Traders who manage their psychology well are less prone to mistakes caused by emotions.

Mastering trading psychology is as crucial as mastering technical or fundamental analysis.

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8.2 How Greed and Fear Affect Trades

Fear

• Triggered by perceived threats to profit.

• Leads to prematurely closing trades or avoiding opportunities.

• Reduces profit potential.

Greed

• Leads traders to hold positions too long in hope of extra gains.

• Can result in losing profits when trades reverse.

• Ignoring take-profit points is a common symptom of greed.

Key takeaway: Greed and fear are natural but become harmful when they override rational decision-making.

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8.3 How to Manage Trading Psychology

1. Stick to Your Trading Plan

• A trading plan includes: goals, strategies, risk tolerance, stop-loss, and take-profit levels.

• Referring to your plan helps prevent emotion-driven decisions.

• Proper trade sizing ensures confidence and limits exposure.

2. Conduct Research and Improve Knowledge

• Stay updated with market news, global events, and economic trends.

• Knowledge allows critical evaluation rather than reactive trading.

• Be cautious of fake news or AI-generated misinformation (e.g., May 2023 Pentagon hoax caused market disruption).

• Maintain a list of trusted news sources and analysts.

3. Remain Flexible and Keep Honing Skills

• Markets are dynamic—traders must adapt and evolve.

• Accept when a trade thesis is invalid; adapt to avoid unnecessary losses.

• Continuously expand your trading toolkit and refine strategies.

• Avoid sticking to favorite strategies if market conditions change.

Successful traders combine discipline, continuous learning, and flexibility.

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Module Recap

• Trading psychology is the biggest influence behind trading decisions.

• Emotional states like greed and fear drive irrational decisions.

• Fear → premature exits or missed opportunities.

• Greed → holding positions too long or risking improperly sized trades.

• Three strategies to manage trading psychology:

  1. Stick to your trading plan

  2. Conduct research and gather knowledge

  3. Stay flexible and constantly hone your skills

Mastering trading psychology reduces emotional errors, increases consistency, and improves long-term profitability.