Trading Psychology

Q1. (4 marks)

• Definition (2): Trading discipline is the ability to consistently follow a predefined set of trading rules/plan regardless of emotions or market noise — executing entries, exits, and risk limits exactly as planned.
• Two consistent behaviours (1 each): e.g., (i) always sizing positions by a fixed risk percentage; (ii) taking every valid signal / not skipping trades; following a fixed pre-market routine; logging every trade. Why: Consistency removes emotional variance, making results statistically meaningful.

Q2. (4 marks)

• Fear (1): Emotion that causes a trader to avoid or exit trades prematurely to prevent loss. Example (1): cutting a winner too early / not taking a valid setup.
• Greed (1): Emotion that pushes a trader to seek excessive gains. Example (1): over-leveraging, holding past target, adding to a winning position recklessly. Why: Both push behaviour away from the plan in opposite directions.

Q3. (4 marks)

• Definition (2): FOMO is the anxiety of missing a profitable move, causing impulsive entries into trades that don't meet one's criteria, often chasing a price that has already moved.
• Two rules (1 each): e.g., only trade pre-defined setups; wait for pullback/confirmation; use alerts not impulsive entries; accept that missed trades are opportunity, not loss.

Q4. (4 marks)

• Definition (2): Revenge trading is entering trades impulsively to quickly recover a recent loss, driven by anger/frustration rather than strategy.
• Sequence (2): (i) Trader takes a loss → (ii) feels frustration/desire to "get it back" → (iii) abandons rules and enters oversized/unplanned trade → (iv) often compounds losses.

Q5. (4 marks)

• Definition (2): Tilt is a state of emotional/mental frustration (borrowed from poker) in which a trader loses rational control and makes poor decisions.
• Two warning signs (1 each): e.g., increasing position size after losses, abandoning stop-losses, overtrading, physical stress signs, ignoring the plan, "must win it back" thinking.

Q6. (5 marks) — 1 mark each for any five:

• Market(s)/instruments traded
• Strategy / entry criteria (setups)
• Exit criteria (stop-loss and take-profit rules)
• Risk management / position sizing rules (max risk per trade)
• Trading hours / routine
• Goals and review schedule
• Max daily loss / drawdown limits

Q7. (4 marks) — 1 mark each for any four:

• Date/time of entry & exit
• Instrument/symbol
• Entry price, exit price, position size
• Setup/reason for trade
• Stop-loss & target levels
• Result (P/L)
• Emotional state / notes/mistakes

Q8. (4 marks)

• Definition (2): Backtesting is applying a trading strategy to historical price data to evaluate how it would have performed before risking real capital.
• Common error (2): e.g., Overfitting — tuning parameters so tightly to past data that the strategy fails on new data; or look-ahead bias — using information not available at the decision time; or ignoring transaction costs/slippage.

Q9. (5 marks)

• (a) Expectancy $= (P_{win}\times \text{AvgWin}) - (P_{loss}\times \text{AvgLoss})$ = (0.40 \times 300) - (0.60 \times 150) = 120 - 90 = \30$ per trade. (2)
• (b) Total = 50 \times 30 = \1500$. (1)
• (c) Process focus (2): A single trade's outcome is random noise; a positive-expectancy process generates profit over many trades. Judging by one outcome leads to abandoning good systems and encourages emotional decisions. Consistency of process is controllable; individual outcomes are not.

Q10. (2 marks)

• $P(\text{loss}) = 1 - 0.45 = 0.55$.
• Four consecutive losses $= 0.55^4 = 0.0915$ (0.09150625). Answer ≈ 0.0915.

[
  {"claim":"Expectancy per trade = 30", "code":"pw=0.40; pl=0.60; aw=300; al=150; e=pw*aw-pl*al; result=(e==30)"},
  {"claim":"Total expected profit over 50 trades = 1500", "code":"e=30; total=50*e; result=(total==1500)"},
  {"claim":"Probability of 4 consecutive losses at 45% win rate = 0.09150625", "code":"p=Rational(55,100)**4; result=(abs(float(p)-0.09150625)<1e-9)"},
  {"claim":"Loss probability = 0.55", "code":"result=(1-0.45==0.55)"}
]