Trading Psychology

Maya sold her 10 paper SBI: show the note on SBI · NSE: SBIN shares at Monday's close on 26 October 2026, ₹960.80, exactly as her plan said: ₹1.80 a share below the ₹962.60 she had paid on paper a week earlier. All through the dinner rush she kept thinking she should have waited until the price came back: the same pull to wait for the bounce she had felt over her margin what-if.

Two things in every result. One is the decision: what you knew, what you planned and whether you followed the plan. The other is luck: what happened that nobody could know. A good decision can lose and a careless one can win. Hindsight, the feeling afterwards that the result was obvious, hides the luck.

The proof. In 1988 Jonathan Baron and John Hershey: show the note on Outcome bias gave students the same decisions with different endings. They rated the thinking as better when the outcome was good, even though, when asked, they said outcomes should not count. A 2023 repeat with 692 people online found the same.

How to judge Maya's Monday. Three questions, none about the price. Did she have a written plan? Yes. Did she follow it? Yes. Was her reason sound with what she knew on Monday? Her plan sold on a date, not a price, so the rehearsal would end and she would practise the whole round trip. The ₹18.00 she lost on paper (₹66.67 with the charges) is a result. The decision was sound.

Not yourself. "I am bad at this" judges a person from one result. "I broke my plan here" or "my reason was weak there" judges a decision, and only a decision can be improved.

What a feeling can and cannot say. Fear, the wish to get even, excitement and envy are reactions inside you. The price on the screen does not know about them. Maya's pull to wait said nothing about SBI's next close; it said a great deal about her: she wanted her ₹1.80 a share back.

When the alarm is right. A strong feeling often points at a real problem in the position: it is too big for your loss budget (risk management 101), it uses money you need, it is borrowed (margin, leverage and pledging), or you do not understand what you bought. Check those first.

The mirror, three questions. What am I feeling, in plain words ("I want my price back")? What is the fact: the last price, the date, my plan's own line? What did my plan say to do here, written before the feeling? If the plan says nothing, that is the problem to fix, not a reason to act.

Why a rule, not willpower. The CFA Institute: show the note on Two kinds of bias, which trains investment professionals, splits biases, the regular tilts in how we judge, in two: errors of reasoning, which better information and method can correct, and emotional biases, which are harder to correct and are best handled with rules made in advance. The feeling will come back; a rule written while calm is waiting for it.

Two questions, one choice. In 1979 Daniel Kahneman and Amos Tversky asked two groups: show the note on Problems 11 and 12 of students and university staff one question each, in Israeli pounds. Group one, 70 people, was given 1000 and asked: take 500 more for sure, or toss a coin for 1000 more or nothing? 84% took the sure 500. Group two, 68 people, was given 2000 and asked: lose 500 for sure, or toss a coin to lose 1000 or nothing? 69% took the coin toss.

The twist. Count the final money: both groups chose between 1500 for sure and a coin toss for 2000 or 1000. The same choice, with opposite answers. Framed as a gain, people play safe; framed as a loss, they gamble to avoid it. "Losses loom larger than gains," the authors wrote. In 2020, 4098 people in 19 countries answered the same kind of questions, and 94% of the original results held.

In real accounts. Hersh Shefrin and Meir Statman named the habit in 1985: the disposition to sell winners too early and ride losers too long. Terrance Odean found it in 10000 US brokerage accounts in 1998: a strong preference for selling winners rather than losers, not justified by how the shares did afterwards. In India, SEBI studied: show the note on Disposition effect 144 IPOs listed from April 2021 to December 2023: individual investors sold 67.6% of their shares within a week when the price had risen more than 20%, and 23.3% when it had fallen (IPOs explained has the study).

What it means for Maya. Her ₹18 loss felt bigger than an ₹18 gain would have. Waiting for her price, as the pull urged, would have been group two's coin toss: a new bet made to escape a feeling. Unsold, the shares would have been worth ₹18 less all the same. For a share you still hold, the honest question is whether you would buy it at today's price.

An anchor is any number that pulls a judgement. In 1974 Amos Tversky and Daniel Kahneman spun a wheel of fortune that landed on 10 or 65, then asked people what share of African countries were in the United Nations. The median answers were 25 and 45. A number everyone knew was random still moved the answer, and paying for accuracy did not stop it.

LIC's ₹949: show the note on LIC · NSE: LICI. In May 2022 the government sold LIC shares to the public at ₹949. On its first day, 17 May, LIC closed at ₹875.25: one lot of 15 shares was ₹1106.25 below its cost. It fell as low as ₹531.85 at the close on 29 March 2023, 44% below the issue price, needing a 78% rise to get back (derived).

Three prices, three anchors. Not every buyer paid ₹949: retail investors paid ₹904 after a discount, and policyholders ₹889. Their numbers were crossed on 16 January, 20 January: show the note on LIC's close, Saturday 20 Jan 2024 and 31 January 2024. On 23 January LIC even traded at ₹950.05, then closed at ₹875.25. The first close above ₹949 came on 31 January 2024: ₹949.75, 624 days after listing.

The anchor moves, and the market never sees it. Owners who sold at ₹949.75 then watched LIC close at ₹1188.10: show the note on LIC's highest price, 1 Aug 2024 on 30 July 2024; a new high becomes a new number to want back. LIC last closed above ₹949 on 2 July 2025. After its 1:1 bonus of 29 May 2026 every holder had twice the shares, so ₹949 became ₹474.50 a share (corporate actions explained covers bonuses). On 28 October 2026 LIC closed at ₹391.45, 17.5% below that adjusted price (derived). The buyers who set each of those prices never knew what anyone else had paid.

The test. Ask: "If I owned none, would I buy this share today, at this price, for my reason?" If yes, your cost is not the reason to hold; if no, your cost is not a reason either, and the money already spent is gone whichever you choose. Your purchase price stays where it belongs, in your records (taxes on shares).

Why it happens. Remember group two in chapter 3: facing a sure loss, 69% chose to gamble. After a loss we are, for a while, those people.

Professionals too. Joshua Coval and Tyler Shumway studied traders who traded Treasury bond futures for their own account at the Chicago Board of Trade in 1998. They "appear highly loss-averse, regularly assuming above-average afternoon risk to recover from morning losses" (2005). Their job was trading; the pull was the same.

The signs. A share chosen because it moves fast, not because of a reason; a bigger size than your budget; less time between trades; skipping the plan "just this once".

Two rules, written in advance. Each trade keeps its own loss budget and its own share count (risk management 101), never "whatever wins it back". And a pause line: show the note on Pause line: after a set loss, no new trade until you have reviewed your journal.

What it is. Confirmation bias: show the note on Confirmation bias is the tendency to seek and believe information that supports what you already think. After her paper sale, Maya noticed she was searching "why SBI will bounce", not "what could keep SBI down" (an illustration: no real posts are shown).

Investors do it. In a 2009 field study on a large South Korean stock message board, 502 investors rated posts that agreed with their view as more convincing; those with the strongest bias were more overconfident, traded more and expected higher returns than warranted (Park and colleagues, 2013). The study relied on volunteers and their own reports, so it shows a pattern, not a measured loss.

Many voices, one source. A post shared fifty times is still one claim. Count where a fact comes from (the company's filing, the exchange's notice, a dated report), not how often you saw it (SEBI and investor protection covers whom to trust).

The habit: the opposite search first. Before buying, write one fact that would prove your reason wrong, and look for it first (how to research a stock puts it in your research note as "what would change my mind"). If you cannot name one, you do not have a reason yet, only a wish.

Maya's good first day. On Monday 19 October 2026, the day she bought on paper, SBI rose 1.15% while the Nifty 50 fell 1.11% (market indices asks whether that was the bank or the market). Her paper shares were up ₹111 by the close. One day said nothing about her skill: she had chosen SBI to practise on, not to beat the market.

Wins raise confidence faster than evidence. Brad Barber and Terrance Odean followed 1607 US investors who moved from phone to online trading in the 1990s. Before the switch they had beaten the market by more than 2% a year. After it they traded more actively and more speculatively, and lagged the market by more than 3% a year. The authors' explanation: overconfidence, helped by crediting wins to skill and by the feeling of control a screen gives (2002).

Losing runs have their own trap. After a long run of red on a roulette wheel: show the note on Gambler's fallacy, "most people erroneously believe that black is now due" (Tversky and Kahneman, 1974). A run of losses does not make a win due, and a run of wins does not make the next one likely. What a run can do is make you check your method and keep your size fixed (risk management 101).

What counts as evidence. A record of many decisions, written before their results, including the losing ones and the costs. A few good days is a story.

GameStop, January 2021. GameStop, a US video-game retailer, closed at $17.25 on 4 January 2021. Through January, forums on Reddit and YouTube "heavily touted" it, and from 13 to 29 January about 100 million shares traded a day, more than 1400% above its 2020 average. It closed at $347.51 on 27 January and touched $483.00 the next day. By 19 February it closed at $40.59 (the SEC's staff report of October 2021; prices of the time: show the note on GameStop's prices). Buyers near the top were following the crowd's price, not a reason of their own.

India's own crowd. Jio Platforms: show the note on Jio Platforms · NSE: JPL' IPO drew bids for 22.19 times the shares on offer, and on its first day, 28 October 2026, 17.73 crore (177 million) shares changed hands in 50.2 lakh (5.02 million) trades; it closed 26.68% above its ₹1119 issue price (derived). This crowd was rewarded on day one. That does not make following it a reason: IPOs explained shows why subscription measures demand, not quality.

Why the crowd's shares are the ones we buy. Barber and Odean (2008) found that individual investors are net buyers of attention-grabbing shares: those in the news, with unusual trading volume or a big one-day move. Buying means choosing from thousands of shares, so what catches the eye wins; selling is mostly from the few you own.

What to do with FOMO, the fear of missing out. Name it, as in chapter 2. Ask what you know that the crowd's price has not already paid for. If the answer is nothing, missing the move costs you nothing: there will be other shares and other days.

Why people overtrade. Barber and Odean followed 66465 US households from 1991 to 1996; the ones that traded most earned least, and the authors concluded that "overconfidence can explain high trading levels and the resulting poor performance" (2000). Trading vs investing shows the bill, in their numbers and in SEBI's studies of Indian traders; this chapter is about why people trade that much.

A test. In a second study of over 35000 households (1991 to 1997), the same authors compared men and women, because psychology research finds men more overconfident in matters of finance. The men traded 45% more, and trading cut their net returns by 2.65 percentage points: show the note on Percentage points a year, against 1.72 for the women (2001). Gender is not the point; confidence is: more confidence, more trades, a bigger bill.

The habit. Count your trades each week and write each one's reason in a line. A trade whose reason is "I was bored", "it was moving" or "I wanted to feel in control" is the one to drop.

Write before, judge after: show the note on Decision journal. A note made before the result cannot be bent by it. Chapter 1's three questions (did I have a plan, did I follow it, was my reason sound with what I knew) are answered from that note, not from the price.

Maya's page. At her paper sale, at the close on Monday 26 October: "Plan: sell at today's close. Feeling: I want ₹962.60 back. Fact: SBI closed at ₹960.80. Decision: sell on paper, as written." After, on Friday 30 October: "Result: −₹18.00 on the price. SBI closed at ₹971.90 on Thursday and ₹961.85 today. Process: plan written, plan followed, reason held. Lesson: my price is a record." And one more line: "Friday: no trade. Nothing met my plan."

The five questions before any trade. What is my reason, in one sentence (how to research a stock)? What fact would prove it wrong (chapter 6)? How much may it lose, and so how many shares (risk management 101)? What am I feeling (chapter 2)? And if the answer to any of these is "I don't know", what does not trading today cost me?

The option not to trade. Not trading has no charge and no loss budget, and it keeps every choice open for tomorrow. It is the one decision you can always make. A journal that shows "no trade: nothing met my plan" on many days is a sign the plan is working. The checks beginners most often skip come next, in 12 beginner mistakes.