Trading Psychology
Chapter: 4.8 Trading Psychology Level: 1 (Recognition) Time Limit: 20 minutes Total Marks: 30
Section A — Multiple Choice (1 mark each) [10 marks]
Q1. FOMO in trading stands for:
- A) Focus On Market Openings
- B) Fear Of Missing Out
- C) Failure Of Money Orders
- D) Following Only Market Opinions
Q2. "Revenge trading" most accurately describes:
- A) Copying a successful trader's positions
- B) Taking impulsive trades to recover a recent loss
- C) Trading only against the market trend
- D) Closing all positions at day's end
Q3. Which of the following best defines discipline in trading?
- A) Making the most profitable trade each day
- B) Consistently following your trading rules regardless of emotion
- C) Trading as frequently as possible
- D) Only trading during high volatility
Q4. "Tilt" refers to:
- A) A chart pattern indicating reversal
- B) A state of emotional frustration causing poor decisions
- C) A method of adjusting stop-losses
- D) A type of limit order
Q5. Backtesting a strategy means:
- A) Testing it on future live trades only
- B) Applying it to historical data to evaluate performance
- C) Asking other traders their opinion
- D) Trading with a smaller account size
Q6. Paper/demo trading is primarily used to:
- A) Guarantee real profits
- B) Practise a strategy without risking real money
- C) Avoid paying broker fees forever
- D) Manipulate market prices
Q7. "Process over outcome" focus means:
- A) Judging yourself by whether a single trade won or lost
- B) Judging yourself by whether you followed a sound process
- C) Ignoring your trading rules
- D) Only tracking your account balance
Q8. Greed most commonly causes a trader to:
- A) Cut winners too early
- B) Over-leverage or hold winners too long chasing more profit
- C) Avoid the market entirely
- D) Follow a written plan strictly
Q9. A written trading plan should typically include:
- A) Only your favourite stock tips
- B) Entry, exit, risk management, and position-sizing rules
- C) Predictions of exact future prices
- D) A guarantee of returns
Q10. A pre-market routine helps a trader mainly by:
- A) Guaranteeing winning trades
- B) Preparing mentally and reviewing the plan before markets open
- C) Eliminating all market risk
- D) Increasing trade frequency
Section B — Matching (1 mark each) [6 marks]
Q11–Q16. Match each term (left) to its best description (right).
| # | Term | Description | |
|---|---|---|---|
| 11 | Trade journal | A | Emotional urge to chase a rising asset |
| 12 | Consistency | B | Record of trades with reasons and outcomes |
| 13 | FOMO | C | Repeating the same rule-based approach over time |
| 14 | Fear | D | Practising strategy risk-free before live use |
| 15 | Demo trading | E | Emotion causing early exits or missed entries |
| 16 | Losing streak | F | A run of consecutive losing trades |
Section C — True/False WITH Justification (2 marks each: 1 answer + 1 reason) [14 marks]
Q17. A trader should increase position size sharply during a losing streak to recover losses faster. (True/False + justify)
Q18. Keeping a detailed trade journal helps identify recurring mistakes and emotional patterns. (True/False + justify)
Q19. Backtesting with future-looking (look-ahead) information gives a realistic estimate of a strategy's performance. (True/False + justify)
Q20. Because process-focused traders always win, outcomes never matter. (True/False + justify)
Q21. FOMO often leads to entering trades late, at worse prices, without a plan. (True/False + justify)
Q22. Managing fear and greed is unimportant if you have a good strategy. (True/False + justify)
Q23. A pre-market routine and regular post-market review both support disciplined, consistent trading. (True/False + justify)
End of paper.
Answer keyMark scheme & solutions
Section A (1 mark each)
Q1 — B (Fear Of Missing Out). Standard term for anxiety about missing a profitable move. [1]
Q2 — B. Revenge trading = impulsive, emotion-driven trades to "win back" a recent loss, abandoning rules. [1]
Q3 — B. Discipline = consistent rule-following independent of emotion; not maximising frequency or profit per trade. [1]
Q4 — B. Tilt (from poker) = frustration/anger degrading decision quality. [1]
Q5 — B. Backtesting applies rules to historical data to evaluate past performance. [1]
Q6 — B. Demo/paper trading lets you practise without real capital at risk. [1]
Q7 — B. Process-focus judges decisions by quality of the process, not a single random outcome. [1]
Q8 — B. Greed drives over-leverage and holding winners too long chasing more. (A "cut winners early" is fear.) [1]
Q9 — B. A plan defines entries, exits, risk management, sizing — not guarantees or exact predictions. [1]
Q10 — B. Pre-market routine prepares the mind and reviews the plan; it cannot guarantee wins. [1]
Section B (1 mark each)
- Q11 → B (Trade journal = record of trades with reasons/outcomes) [1]
- Q12 → C (Consistency = repeating same rule-based approach) [1]
- Q13 → A (FOMO = urge to chase a rising asset) [1]
- Q14 → E (Fear = early exits / missed entries) [1]
- Q15 → D (Demo trading = risk-free practice) [1]
- Q16 → F (Losing streak = run of consecutive losses) [1]
Section C (1 mark answer + 1 mark justification)
Q17 — FALSE. [1] Increasing size during a losing streak amplifies risk of ruin; sound practice is to reduce size or pause and review the process. [1]
Q18 — TRUE. [1] Journaling records reasons, emotions and outcomes, revealing repeated errors and emotional triggers so they can be corrected. [1]
Q19 — FALSE. [1] Look-ahead bias uses information not available at the time, inflating results; a realistic backtest must use only data known at each point. [1]
Q20 — FALSE. [1] Good process improves expected results over many trades but does not make every trade a win; individual outcomes still vary due to chance. [1]
Q21 — TRUE. [1] FOMO pushes late entries at worse prices without proper setup or risk management, worsening the risk/reward. [1]
Q22 — FALSE. [1] Even a good strategy fails if fear/greed cause deviation from it; emotional control is essential to execute the edge. [1]
Q23 — TRUE. [1] Pre-market routine sets focus and plan; post-market review captures lessons — together they reinforce discipline and consistency. [1]
Mark Summary
- Section A: 10 marks
- Section B: 6 marks
- Section C: 14 marks
- Total: 30 marks
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