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Trading psychology

Loss aversion

Loss aversion in trading is the asymmetry where losses hurt about twice as much as equivalent gains feel good — the bias quietly running your exits.

Kahneman and Tversky's prospect theory documented that the pain of losing $100 is roughly twice the pleasure of gaining $100. This is loss aversion.

In trading it manifests as: holding losers too long ('it'll come back'), cutting winners too early ('lock it in'), and over-hedging in ways that destroy edge.

The signature pattern in a journal: average loss > average win, even when win rate is high. R-multiple distribution skews negative. The strategy has expectancy on paper but the execution doesn't capture it.

Awareness alone helps — knowing you'll feel the urge to hold a loser past your stop makes it easier to honor the stop. Rules-based discipline (pre-set stops that the broker enforces, not mental stops) is the standard countermeasure.

Not financial advice. This page describes a commonly-used trading concept for educational purposes. It is not a recommendation, does not predict performance, and is not personalized advice. Past performance does not guarantee future results.