In trading, the most difficult part is the psychology. Human instinct is to take profits early and cut losses late, it is very natural, it has been scientifically proven by two scientists Daniel Kahneman and Amos Tversky, who won the Nobel Prize in Economics, based on very simple questionnaires, in the example below.
Scenario 1. You receive a REWARD, which of the following scenarios do you choose?
A. 100% sure to get a $3000 bonus
B. 80% receive a $4000 reward, 20% receive nothing
Situation 2. You experience a LOSS, which of the following situations will you choose?
C. 100% sure to lose $3000
D. 80% lost $4000, 20% lost nothing
Scenario 1 represents the case of taking profit early. Why? In this case, the majority, because of the psychological problem in the genetic code, will choose option A with 100% certainty to get the amount of 3000$. But according to the mathematical expectation formula, in the long run, choosing option B is more beneficial because 0.8 (80%) 4000$ - 0.2 (20%) 0 = 3200$ will be greater than the amount of 3000$ from option A.
Scenario 2 represents the case of not wanting to use a stop loss order (StopLoss). Why? In this case, because they do not want to accept a 100% sure loss of $3000 from the beginning, the majority, due to the psychological problem in the genetic code, will choose option D. According to the mathematical expectation formula, in the long run, choosing option D will cause more losses because 0.8 (80%) 4000$ - 0.2 (20%) 0 = $3200 will be greater than the fixed loss of $3000 of option C.
The above two situations are perfect examples of how a new trader never wants to set a Stop Loss order with a fixed amount of money that can be lost, accepting a huge loss order that will blow up the account rather than accepting a small initial loss. In case the order has a little profit, they immediately cut it to satisfy with a small amount of money, but do not persevere to let the order run longer to generate a larger profit. Most traders are stuck in this psychological state for a long time (maybe many years) without realizing the problem.
To become a consistently profitable Trader, practicing placing SL orders with a defined loss and holding profits far enough (RiskReward RR 1:2, 1:3) is a time-consuming but truly valuable practice to transform from an unprofitable or erratic profitable trader into a consistently profitable Trader over time.
I hope you realize the problem in your mentality and make an effort to change it to become a Trader with stable profits.
