Losses hurt more than wins feel good
People do not weigh gains and losses equally. Losing a given amount registers as a stronger event than gaining the same amount — the finding known as loss aversion, from the prospect theory work of Kahneman and Tversky. It is not a flaw specific to traders; it is how humans evaluate risk generally.
In a market this produces a very specific and very expensive pattern: cutting winners early and letting losers run. Both feel right in the moment. Closing a winner converts an uncertain gain into a certain one and stops the discomfort of watching it fluctuate. Holding a loser postpones the moment the loss becomes real — while it is open, it still might come back.
Notice that both behaviours are attempts to manage a feeling, not to manage a position. The market does not know or care where you entered. Your entry price is information about your past, not about what price will do next. The question is always "would I open this position right now, at this price, on this information?" — and if the answer is no, the fact that you are already in it is not a reason to stay.
The second-order effect is worse than the first. A method with a genuine edge can be turned into a losing one purely through this asymmetry: small wins, large losses, and a strategy that tested well now bleeds.
What helps is making the exit not a decision. A stop placed at entry and a target defined at entry take the exit out of the hands of the person who will be uncomfortable later. Moving a stop further away is the single most reliable warning sign that this is happening.
What to take away
- Loss aversion means a loss registers more strongly than an equivalent gain (Kahneman & Tversky).
- It produces cut-winners-early, hold-losers-long — both of which manage feelings, not positions.
- Your entry price says nothing about what price does next.
- Moving a stop further away is the clearest signal that discomfort, not analysis, is driving.
This chapter, measured against your own trades
In the app the same chapter ends in your figures rather than an example: how often you did the thing it describes, over your last ninety days. You pick one change to make, and Evidence checks afterwards whether it actually changed — from your journal, arithmetic, no opinion involved. Questions you get wrong come back a week later and again a month after that.
Open the free plan →Check that it stuck
Answers shown — in the app these are asked before you see them, and the ones you get wrong come back after a week.