Trading Psychology
Trading Psychology Basics
Loss aversion, recency bias, overconfidence, and overtrading — how ordinary human wiring interacts with financial markets.
- Reading time
- 8 min read
- Difficulty
- Beginner
- Author
- Foundation education team
- Updated
- Updated 2026-01-12
Why psychology matters
Financial decisions are made by people under uncertainty, with money at stake and incomplete information. Predictable patterns of human behaviour appear in that environment regardless of intelligence or experience.
Four recurring patterns
Loss aversion: losses are felt more intensely than equivalent gains, which encourages holding losing positions too long. Recency bias: recent events feel more representative than they are. Overconfidence: a small run of good outcomes is mistaken for skill. Overtrading: acting frequently because activity feels productive.
What helps
Written rules made before money is at stake, a journal recording reasoning rather than results, and a defined review cadence. These practices do not eliminate bias; they make it visible.
Key takeaways
- Behavioural patterns affect everyone, not just beginners.
- Loss aversion, recency bias, overconfidence, and overtrading recur.
- Rules written in advance reduce in-the-moment improvisation.
- Journaling reasoning is more useful than journaling outcomes.