📖 This issue's entry: Loss Aversion -- Why do you always 'hold on and not cut losses'? Why do you cling to a hot potato as if it's burning your hands, even when it feels like you're about to get burned?! Why?!
🎯 Difficulty: ⭐ (Beginner Level)
🔥 Sentiment Danger Index: 🔥🔥🔥🔥🔥 (Level 5)
❓ What is this:
Core concept of behavioral economics. It means that the pain of losing $100 is psychologically much stronger than the pleasure of gaining $100. To avoid the pain of a 'certain loss', you might choose an 'uncertain future' that could lead to larger losses.
🧠 Real trading scenario:
“I opened a long position, and the moment I went in it dropped 2%. You know I should have stopped out according to the plan, so the loss would have been 5%. But when my hand is on the ‘close position’ button, there’s a voice in my head saying: ‘Hold on a bit—what if it rebounds? If I stop now, that 5% really is gone. It’s too costly.’”
I didn’t stop in time. Two hours later, the market dropped 15%, and I was forcibly closed out—I lost 90%.”
📌 Why does it harm people?
- Treat floating losses as “real”: You’ll fall for the self-deception of “It isn’t a true loss unless I close the position,” abandoning any reasonable risk-reward calculations entirely.
- Numb yourself with a small probability: To avoid a small pain of “-5%,” you choose to embrace a big risk of “-50%,” just to gamble on that small-probability event that “might bounce back.”
- Distort the risk-reward ratio: Once losses expand, you’ll get trapped in the lie of “No stop-out means it isn’t truly a loss,” and you completely give up calculating any reasonable risk-reward ratio.
💊 The cure (3-step hands-on):
1. Set a stop-loss at entry: When placing an order, you must set the stop-loss price at the same time. Treat this “stop-loss level” as the “fixed cost” or “insurance premium” for opening this trade.
2. Physical isolation: Once the price touches your stop-loss level, **execute the close position immediately, right away.** If you can’t, give the mouse to someone next to you, or directly shut down and leave the computer for 10 minutes.
3. Pre-emptive mental preparation: Before the market opens every day, tell yourself three times: “Today I’m willing to lose X% of the principal (X<=10%). This is my operating cost for today. If it goes beyond this, I shut down.”
🧘 Mindfulness practice (can be done in 30 seconds):
When you stare at the number showing a floating loss and feel your heart rate speed up and your palms sweat, close your eyes immediately. Take one deep breath and silently repeat: “**This number is called ‘sunk cost.’ The cost of stopping out, I already paid when I opened the position.**” Then open your eyes and execute.
📝 Quote summary:
“The market doesn’t owe you getting back to breakeven—you’re just too afraid to admit defeat. A small loss is a blessing; a big loss is poison.”
🗣️ Introspection question for this episode:
“Have you ever refused to ‘admit defeat’ and stop-loss, only to turn a small loss into a huge liquidation after stubbornly holding on? In the comments, tell your story in one sentence.”
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