You might think trading psychology is just an abstract idea with no real-world relevance. However, this couldn’t be further from the truth. In fact, we can clearly see the effects of psychology on live trading charts, and understanding this can be a game-changer for your trading success.
Fear of Missing Out (FOMO)
Let’s start by diving into an example of a trader gripped by FOMO—one of the most common psychological traps. We’ll walk through some of their decision-making processes.
In our USD/CHF scenario, imagine the market has been steadily climbing in an uptrend, forming an ascending channel. Eventually, it breaks the lower boundary of that channel, also known as support. Our trader had been waiting for this break as a signal to enter a sell trade, anticipating a sharp downward move. And sure enough, the market does break the support level, confirming the trader’s analysis.
Figure: A trader missing out on the initial move downwards.
Unfortunately, our trader wasn’t in front of the screen when the move began, so they missed out on the initial, significant drop.
When the trader returns, they panic, gripped by FOMO, and decide to sell immediately at the current market price, without pausing to analyze if the market will retrace or waiting for a better entry point.
What happens next?
Figure: Price moving up after the trader sold
As the figure above illustrates, the market reverses upward, causing the trader to lose money. The impulsive entry, driven by the fear of missing out, led to an unnecessary loss. In this case, the market may have been forming a double top pattern, which would have signalled a better re-entry for the sell trade. But by acting hastily, our trader not only missed a potentially better trade setup but also risked more capital than necessary.
The key takeaway is that losses like this create a domino effect. After suffering a loss, traders often become hesitant to enter future trades, even when the setups are clear, because the psychological hit causes self-doubt and hesitation. This negative emotional spiral leads to more mistakes and could, ultimately, cause failure.
Greed
Now, let’s look at how greed affects trading decisions, especially among newer or less experienced traders. Greed can be just as destructive as FOMO, and often stems from the same underlying issue: poor psychological control.
A trader exhibits greed when they fail to secure profits on a trade that has already performed well. They want to squeeze every last pip out of the market, and that leads them to ignore the need for exit strategies or proper trade management.
Figure: Visualizing greed.
In our GBP/USD example above, the trader bought at an ideal spot and saw impressive gains over two weeks. However, instead of locking in those profits, greed kicked in. The trader held on, hoping for even more gains. What followed was a rapid reversal, and the market began to plummet. The trader lost all of their unrealized profits—and potentially even more if they failed to cut their losses.
This is the cost of unchecked greed. Traders often forget that holding out for more can backfire. Some see it as leaving money on the table, but it’s actually a critical part of risk management. Greedy traders either don’t know how to manage their trades effectively or they believe that closing too early means they’ve missed out on potential profits. But in reality, securing your profits when the market is in your favor is a crucial skill.
While greed is commonly viewed negatively, it’s not inherently bad. As Warren Buffet famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Greed, when applied correctly, can actually be a strategic asset, motivating you to seize opportunities when the timing is right. However, for most traders, greed becomes a double-edged sword, leading to losses when it’s not properly controlled.
The lesson here is that understanding how greed and FOMO manifest in your trading decisions can help you develop better habits and avoid emotional traps that can wipe out your capital. By learning how to manage these emotions, you’ll be in a much stronger position to make rational, profitable trades.