I’ve been involved in options trading since 2006. During this time, I’ve uncovered a ton of cognitive biases in myself and in others as well.
Below, I’ve compiled the TOP 20 most common phenomenas. You could also call these trading psychology mistakes, but they aren’t necessarily mistakes. Instead, they’re general tendencies that are worth being conscious of, because only then can we control them.
TOP 20 Trading Psychology Phenomena
This entire list is completely subjective and doesn’t reflect any particular order of importance.
Overconfidence
Overconfidence often develops when a trader has a streak of winning trades and starts to feel they’ve “conquered” the market, or that the market is so predictable they can practically never lose. This is dangerous because the trader may neglect basic risk management principles, open oversized positions, or trade instruments they don’t really understand.
A typical sign of overconfidence is when a trader starts ignoring market signals, indicators, and other rational forms of analysis. The thought process often goes like, “I already know what’s going to happen, so I don’t need to pay attention to those things.”
FOMO (Fear of Missing Out)
FOMO sets in when a trader spots an asset or market that’s rising or falling rapidly, and they feel that if they don’t jump in right now, they’ll miss a huge opportunity. In this mindset, traders tend to enter positions hastily and often without a solid foundation. These decisions usually aren’t backed by proper market analysis or risk management, and that often leads to serious losses.
Fear of Loss
Fear of loss is one of the most widespread psychological factors influencing traders’ decisions. In this state, a trader avoids taking steps that could potentially lead to losses, even if those steps might produce profit in the long run. As a result, the trader might choose an overly conservative strategy and miss out on opportunities with higher profit potential.
Fear of loss often stems from a lack of self-confidence and can lead to “analysis paralysis,” where indecision takes over. Ultimately, it’s also a fear of failure. But trading can’t be done without experiencing losses at some point. If someone can’t accept that losses are a built-in part of this “game,” they really shouldn’t even start!
Anchoring Effect
The anchoring effect is another important psychological factor that can greatly influence trading decisions. It occurs when a trader ties their decisions to an initial value— the so-called “anchor”—and refuses to let go of it, even when new information or market changes would justify revisiting that anchor.
For example, if you’re used to seeing a particular stock hover around $100, and suddenly it shoots up to $150, you may feel like it’s “too expensive,” simply because the $100 price is acting as your anchor. You might then avoid buying the stock or buy puts against it, even though the new price could be completely justified by, say, the company’s revenue surge or entry into new markets.
Excessive Attachment
Excessive attachment is another common psychological trap. This mistake shows up in traders who get emotionally attached to a specific instrument, strategy, or decision, without properly evaluating its current performance or risk.
In this mindset, the trader starts making emotional rather than rational decisions. When you’re overly attached to a particular stock or strategy, you might keep holding a position way too long, even when market data or your trading plan has been signaling that it’s time to sell or close.
Revenge After Loss
“Revenge after loss” describes the state where, after a losing trade, a trader suddenly adopts a high-risk strategy in an attempt to quickly recoup the lost money. This “revenge trading” typically involves impulsive, poorly thought-out decisions, which often lead to further losses. These decisions are driven by emotion and rarely work out well.
Complacency After Profit
“Complacency after profit” is the opposite scenario. After a big win, a trader might get overly relaxed and forget that the market is constantly changing. This kind of complacency or excessive confidence can lead them not to prepare sufficiently for their next trades, or to ignore that past success doesn’t guarantee future results. It can slip right into the overconfidence issue I mentioned in point 1.
Excessive Risk-Taking
Excessive risk-taking is familiar to many traders, especially those who lack experience or don’t follow a well-thought-out risk management strategy.
In this state, the trader tends to place bigger trades than they can really afford or goes for highly speculative strategies. They often forget about the risk-reward ratio and only focus on the potential massive profit.
Overtrading
Overtrading is one of the most common trading mistakes. It’s especially common among traders who feel they have to be constantly “in the game” in order to make money.
When overtrading, a trader opens too many transactions in a given period, often without proper justification or planning. This phenomenon is often linked to reacting to market “noise” and making impulsive decisions. In many cases, overtrading can stem from a subconscious need to “be useful” or “do something.” However, in trading, constantly “doing something” can be a fatal flaw.
Loss Denial
In the state of loss denial, a trader refuses to accept that a position might be losing and fails to take timely steps to reduce risk. This is usually accompanied by unwarranted optimism or distorted reality. The trader clings to hope that the market will “turn around,” and that the losing position will return to profit. I like to call this “hope trading.”
Hindsight Bias
Hindsight bias refers to how people tend to believe that a particular event or outcome was “obviously predictable” after it has already happened. This distorts objective judgment and can inflate a trader’s self-confidence, leading to excessive risk-taking or other psychological pitfalls. If you look back and think, “Well, that was totally obvious,” but you did nothing about it at the time, it can also trigger self-esteem issues.
Confirmation Bias
Confirmation bias is the tendency to notice only information that supports your existing views or expectations and to disregard or reject information that contradicts them. Because of it, critical information that could change your analysis might slip under the radar.
Typically, a trader under confirmation bias will only pay attention to news and analyses pointing in the direction they’re hoping for. If, for instance, you believe the market is finally ready to climb, you’ll only see and factor in bullish news. Anything that suggests the opposite is ignored, or you pretend it doesn’t exist.
Recency Bias
This phenomenon refers to the tendency to place too much emphasis on the most recent events or data points when making decisions, while ignoring older but equally relevant information. This bias can lead traders to abandon a strategy or outlook too quickly just because a handful of recent trades or market moves appear to contradict it.
Fear and Greed
These two timeless emotions show up in almost every other phenomenon. Fear—especially the fear of losses—can heavily impact trading. It might cause traders to close positions too early (before hitting either a take-profit or stop-loss) or hold onto a losing position for too long, hoping it will come back.
Greed is the other side of the coin. Traders, especially when riding a winning streak, are prone to taking huge risks. Potentially high-return option strategies can be especially dangerous when greed overrides common sense.
Impulsivity
Impulsivity is when traders make snap decisions without thorough analysis or a well-defined trading plan. Under the influence of FOMO or “breaking news,” people tend to open or close positions immediately, often at the worst times. A classic example of impulsivity is panic selling when the market starts to plummet.
Searching for the “Holy Grail”
This psychological phenomenon is all about constantly seeking new strategies, indicators, or “hot tips” in hopes of finding the one thing that solves every problem and guarantees profits. Traders caught in this trap usually jump from system to system without giving any approach the time or study it needs to prove itself. The ending is usually the same: losses, burnout, and eventually quitting trading altogether.
Emotional Decision-Making
Emotional decision-making happens often in trading and greatly affects a trader’s performance. Emotions like fear, greed, revenge, or even excitement guide these choices instead of solid market data or analysis. Trading decisions should never be made based on emotions!
Suggestibility or Social Influence
This phenomenon describes how traders may be inclined to follow other people’s opinions, actions, or decisions without doing their own due diligence. You’ll see this all the time on social media, where “experts” and “influencers” throw out trading tips, and folks dive in without seeing the whole picture or understanding the risks. It usually stems from a lack of self-confidence and a reluctance to take responsibility. There is a solution, though: keep learning!
Comparing Yourself to Others
Traders frequently compare their own performance to others—friends, community members, or professional traders. Social media makes this even worse, since people often only share their successes, not their failures. This behavior can trigger serious self-esteem issues. I don’t recommend comparing yourself to anyone!
Fixed Mindset
Traders stuck in a fixed mindset believe that their abilities, talents, and results are static and unchangeable. They think if they’re “bad” or “good” at something, that’s how it will always be, and they’re less willing to improve or learn new things. In my view, adaptability should be one of the most important traits for a trader. The market changes, so you need to be ready to adapt—sometimes that means updating your strategies right along with it.
These are the 20 most common trading psychology phenomena I’ve encountered. Every trader (myself included!) goes through these stages. The main goal is to be aware of them, so we can keep them under control and not let them sabotage our trading.
