Trading Psychology Flashcards

What is FOMO in trading?

Answer: Fear Of Missing Out — the anxiety of missing a profitable trade that leads to impulsive decisions

FOMO causes traders to enter trades impulsively without proper analysis, often at unfavorable prices, because they fear missing a move that others might profit from.

Why is having a trading plan important?

Answer: It provides a systematic framework for entry, exit, and risk management, removing emotional decision-making

A trading plan creates discipline by defining rules for when to enter, when to exit, and how much to risk, preventing emotional reactions to market volatility.

What is 'revenge trading'?

Answer: Impulsively increasing trade size or frequency after a loss to try to recover money quickly

Revenge trading is an emotional response to losses where traders abandon their plan, increase risk, and make impulsive trades, usually resulting in even larger losses.

What is the importance of a trading journal?

Answer: It documents trades, reasoning, outcomes, and emotions to identify patterns and improve performance

A trading journal provides data for self-analysis, helping identify which setups work, what mistakes are repeated, and how emotions affect decision-making.

What does 'cutting losses short' mean?

Answer: Exiting losing positions quickly at predetermined stop-loss levels instead of hoping they recover

Cutting losses short means accepting small losses quickly rather than holding losing positions and hoping for a reversal, which often leads to much larger losses.

What is confirmation bias in trading?

Answer: The tendency to seek out information that supports your existing view while ignoring contradictory evidence

Confirmation bias causes traders to focus on data that supports their trade thesis while dismissing warning signs, leading to poor decisions.