Why Traders or Investor tends to hold onto loosing position and selling their profitable one

Investors or traders tend to feel twice as bad about a loss as they feel good about a gain of the same size. As a result, they end up holding onto (not “disposing” of) a losing position, hoping that it will regain its value.

Similarly as profit grow, fear of losing the gained profit also grow and ultimately an investor/trader ending up with selling profitable position and holding onto loosing one.

This happen due to loss aversion affect

What is loss Aversion ?

Loss aversion is common in cognitive psychology, decision theory, and behavioral economics. In our everyday lives, loss aversion is especially common when individuals deal with financial decisions.

An individual is less likely to buy a stock if it’s seen as risky with the potential for a loss of money, even though the reward potential is high. 

Research on loss aversion shows that investors feel the pain of a loss more than twice as strongly as they feel the enjoyment of making a profit

Example of loss aversion:

1.     Investing in low-return, guaranteed investments over more promising investments that carry higher risk.

2.    Not selling a stock that you hold when your current rational analysis of the stock clearly indicates that it should be abandoned as an investment.

3.   Selling a stock that has gone up slightly in price just to realize a gain of any amount, when your analysis indicates that the stock should be held longer for a much larger profit.

4.    Telling oneself that an investment is not a loss until it’s realized (i.e., when the investment is sold).

How to avoid  loss aversion :

    The answer is simple & of one line

RISK MANAGEMENT

1.    Calculate your risk before entering into a trade, determine your maximum loss before making any investment decision

2.    Try practicing Stop loss while trading or hedging your investment

3.    Take only calculated risk which you you can digest

4.    Purchase investments with relatively low price volatility

5.    Consciously remain aware of loss aversion as a potential weakness in your investing  decisions