Great Read for all traders, dealing with aspect responsible for 95% of trading – Psychology.
While taking small losses may seem like a simple matter of discipline, there are a number of reasons why this is not the case. I have written about it already, but to summarize briefly, holding a losing position tends to spur a set of psychological processes which interrupt the rational choice of realizing the loss.
Once the trader is holding a loser, anxiety increases which spurs the avoidance of loss realization.
Next, the trader will tend to begin rationalizing the position and the loss avoidant behavior with automatic internal statement such as, “this has to come back” or “if I can just get even.”
There are five basic components at play here. These are:
Situational – The trader is in a losing trade
Behavioral – The trader is avoiding loss realization by holding the loser and not selling rationally while the loss is small.
Affective – The trader is experiencing anxiety which increases as the loss increases.
Cognitive – The trader has begun rationalizing the loss with automatic internal statements.
Neuropsychological – The anxiety is accompanied by chemical changes in the central nervous system.
Read full article for tips on how to deal with this problem:
Phil Pearlman – Training Yourself To Take Small Losses Quickly.