The Role of Emotions in Prop Trading

Jeremy BiberdorfBy: Jeremy Biberdorf

July 6, 2023July 6, 2023

In the fast-paced world of financial trading, the ability to make clear, rational decisions is paramount. However, this is often easier said than done. In proprietary, or ‘prop’, trading, where financial firms trade stocks, bonds, currencies, commodities, and other financial instruments with their own money, the stakes are especially high. For these traders, understanding the impact of emotions in prop trading is not just advisable – it’s essential.

As market conditions change and fluctuate, so too do traders’ emotions. When these emotions are left unchecked, they can significantly affect trading decisions, often leading to significant losses. This article will explore the role of emotions in prop trading, highlighting the importance of emotional awareness and control in the success of prop traders. Understanding and managing emotional trading is not merely an advisable skill, but a necessity in the challenging realm of prop trading.

Definition of Prop Trading

Proprietary trading, commonly referred to as “prop trading”, is a high-stakes financial activity that’s integral to the world of finance. Prop trading occurs when a financial firm, such as a bank or a hedge fund, uses its own funds to trade stocks, bonds, derivatives, commodities, or other financial instruments, in order to generate direct profit rather than earning commission by trading on behalf of clients.

Prop trading plays a significant role in the financial industry. Financial firms participating in prop trading assume a higher level of risk, as their own capital is directly invested in the market. However, the potential for substantial profits is a strong draw. Prop traders strive to capitalize on short-term market trends and fluctuations, which require strategic thinking, speed, and a profound understanding of global financial markets.

Understanding the dynamic and often volatile nature of prop trading is the first step to appreciating the impact of emotions on trading decisions. As we delve deeper into the emotional landscape of this challenging arena, we’ll see why managing one’s emotional reactions can be a deciding factor between success and failure.

Emotions and Trading

Even with the most sophisticated algorithms and advanced trading platforms, there is a distinctly human element to trading that cannot be ignored – emotions. Emotional trading is a term used to describe trading decisions influenced more by feelings than by objective data. As humans, traders are not impervious to their emotions; they can experience fear, greed, hope, and a range of other emotions that can potentially sway their trading decisions.

In prop trading, where financial risks and rewards are high, these emotions can run particularly deep. A profitable trade may induce euphoria and confidence, leading to overconfidence and riskier trades. Conversely, a losing trade can lead to fear and panic, causing traders to sell off their positions too early or avoid beneficial trades due to fear of further losses.

Emotional responses are part of our evolutionary biology, designed to protect us from harm. However, in the world of trading, these instinctive reactions can often lead to rash decisions that negatively impact a trader’s portfolio. A successful prop trader understands and acknowledges these emotions, but does not let them dictate their trading strategy. Recognizing the role of emotional trading is the first step to mitigating its potential impact and fostering long-term trading success.

Common Emotional Pitfalls in Prop Trading

Prop trading, with its high-stress environment and potential for substantial gains and losses, can provoke strong emotional responses. Understanding these emotions, their causes, and their impact on decision-making processes is a key part of the psychology of trading. Here, we identify and elaborate on some common emotional pitfalls that prop traders may encounter:


Fear can manifest in many ways, such as fear of missing out (FOMO) on a profitable trade or fear of losing money. These fears can lead traders to jump into ill-timed trades or hold onto losing positions in the hope they’ll rebound.


Greed is another potent emotion in trading. It can cause traders to hold onto winning positions for too long in the hope of squeezing out every last bit of profit, often resulting in missed opportunities to sell at the right time.


Regret can occur when traders reflect on missed opportunities or past mistakes. This can lead to “revenge trading”, where traders try to recoup previous losses by making more aggressive and risky trades.


Success in trading can sometimes lead to overconfidence, causing traders to underestimate the risks involved in their trades. This can result in larger and riskier positions that could potentially wipe out previous gains.

Recognizing and understanding these emotions are the first steps to maintaining trading discipline. It’s crucial for traders to manage their emotional responses, ensuring they don’t detract from well-reasoned, data-driven decisions. Successful prop trading requires both the mastery of emotional self-control and a disciplined approach to decision making. Managing emotions is not about eliminating them, but rather acknowledging their presence and making sure they don’t interfere with the process of informed trading.

The Role of Behavioral Finance

Behavioral finance is a field of study that combines psychology and economics to explain why and how investors act and to analyze how that behavior affects markets and trading outcomes. It challenges the traditional finance theory that markets and investors are perfectly rational and always make decisions that maximize their benefits.

In the world of prop trading, behavioral finance has a particularly important role. It provides a framework for understanding how emotions and cognitive biases can affect trading decisions, leading to potential mistakes or suboptimal choices. Common behavioral biases in trading include loss aversion (a tendency to prefer avoiding losses over acquiring equivalent gains), herd behavior (copying the actions of larger groups, even against one’s own better judgement), and confirmation bias (overvaluing information that supports our existing beliefs and undervaluing information that contradicts them).

By recognizing these biases and understanding their psychological roots, traders can strive to correct their thinking patterns and make more rational decisions. For instance, a trader might develop strategies to avoid knee-jerk reactions and instead take a step back to analyze the situation more objectively before deciding on a course of action.

Understanding one’s own behavior, including emotional triggers and inherent biases, can indeed lead to more successful trading outcomes. In essence, behavioral finance encourages traders to be introspective, to challenge their assumptions and to strive for emotional neutrality, thereby mitigating the effects of emotional trading and enhancing the effectiveness of their trading strategies.

The Importance of Emotional Intelligence in Prop Trading

Emotional intelligence, a concept popularized by psychologist Daniel Goleman, refers to the ability to understand, use, and manage our own emotions in positive ways. In the high-stakes world of prop trading, emotional intelligence can provide traders with a significant competitive edge. Here’s why:

Self-Awareness: Emotional intelligence begins with self-awareness. Traders with high emotional intelligence can recognize their emotional states and understand how these emotions can influence their decision-making. For instance, the awareness of feelings of fear or greed can help traders control impulsive reactions and make more measured choices.

Self-Regulation: After recognizing emotions, managing them is crucial. Traders with high emotional intelligence can control their emotions and adapt to changing circumstances. They are better equipped to handle stress, maintain calm, and stay focused, especially in volatile trading environments.

Motivation: Emotional intelligence can also drive motivation. Traders who can manage their emotions effectively are likely to be more resilient in the face of losses and more disciplined in following their trading plans.

Empathy: While trading may seem a solitary activity, empathy—the ability to understand others’ emotions—plays a role. Understanding market sentiment, which is essentially the collective emotions of other market participants, can provide valuable insights for making trading decisions.

Emotional intelligence is a valuable asset in prop trading. By understanding and managing their emotions, traders can navigate the emotional roller-coaster of the trading world more effectively, make better decisions, and ultimately improve their trading performance. With increased emotional intelligence, prop traders can enhance their resilience, sharpen their decision-making skills, and increase their overall trading success.

Strategies to Manage Emotions in Prop Trading

Maintaining trading discipline and managing emotions effectively are critical for success in prop trading. Here are several practical strategies that can help prop traders better handle their emotional responses:

Create and Follow a Trading Plan: Having a clearly defined trading plan can help limit emotional influence on trading decisions. This plan should detail the specific conditions under which trades will be made, including entry and exit points, risk levels, and profit targets. By sticking to this plan, traders can avoid impulsive decisions driven by fear or greed.

Practice Mindfulness and Meditation: Techniques such as mindfulness and meditation can be effective in managing stress and promoting emotional balance. By improving focus and self-awareness, these techniques can help traders recognize their emotional states and control their reactions.

Regularly Review Trades: Conducting regular reviews of past trades, both successful and unsuccessful ones, can help traders identify any emotional patterns or biases that might be affecting their trading decisions. By understanding these patterns, traders can work on altering their responses to similar situations in the future.

Maintain a Healthy Lifestyle: Physical health can significantly influence emotional wellbeing. Regular exercise, a balanced diet, and adequate sleep can enhance cognitive function, mood, and stress management capabilities, thereby supporting better trading decisions.

Seek Professional Advice: Consulting with psychologists or trading coaches specializing in trading psychology can provide valuable insights. These professionals can offer personalized strategies for managing emotions and improving trading discipline.

By employing these strategies, prop traders can effectively manage their emotions, fostering trading discipline and improving overall trading performance. While emotions are an inherent part of trading, learning to manage them effectively can lead to more rational decisions and, ultimately, trading success.

Using Prop Trading Tools and Resources

In addition to practicing emotional intelligence and applying behavioral finance principles, prop traders can take advantage of various tools and resources to enhance their trading performance and emotional management.

For instance, educational platforms such as Real Life Trading and TheoTrade provide courses and resources to better understand trading strategies and market dynamics. These platforms offer a wealth of information that can strengthen a trader’s knowledge base, reduce uncertainty, and help manage the fear that often accompanies trading.

Alongside education, tracking trades and reviewing performance is crucial for identifying emotional patterns and biases in trading. TraderSync and Tradervue offer robust trade journaling solutions that enable traders to log their trades, analyze performance, and gain insights into their trading habits. This process can be invaluable for pinpointing emotional triggers and improving future decision-making.

For a more focused approach on trading psychology, Edgewonk provides a unique trading journal that integrates psychological metrics. It allows traders to track emotions alongside regular trade data, offering a comprehensive view of how emotions may be influencing trading outcomes.

You can also refer to this list of best free trading journals for more options that can fit your specific needs and budget.

In summary, these resources and tools can be instrumental in managing emotions in prop trading. They offer powerful ways to build knowledge, track performance, understand emotional patterns, and, ultimately, enhance trading discipline and success.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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