Those who trade have certainly heard the saying 'cut losses short and let profits run,' but in actual trading, we often do not follow this adage, and sometimes even act contrary to it.
We once conducted a data analysis investigating what happens to a large number of futures accounts from inception to demise.
Statistics show that the vast majority of futures accounts have a lifespan of 3 to 6 months. Further statistics on these accounts' trading indicators reveal that most accounts have a high win rate, with some extreme cases reaching over 90%, yet they ultimately leave the market at a loss.
The reason lies in 'holding onto losses until the bitter end, running away with small profits.' Once in a position, they refuse to exit until their floating losses return to breakeven, but the moment they see a bit of floating profit, they run away.
This is almost the norm when trading futures; sometimes we may not even realize this, and sometimes even when we do, we cannot control or change it.
Those who do not trade futures may not feel this despair. Those who have traded futures ultimately attribute it to human weakness; after all, futures are against human nature!
To become a successful trader, it is necessary to dig deep into the nature that governs us.
Let's first look at an experiment conducted over a decade ago by The Economist at a domestic factory:
In 2010, The Economist reported on an experiment. The experiment took place in a factory, and the subjects were divided into two groups of workers.
At the beginning of the week, tell one group of workers that if they complete the required production tasks this week, they will receive a bonus of 80 yuan. The other group of workers is told that they have an 80 yuan bonus this week, but if they do not complete the tasks, the bonus will be deducted.
In any case, this seems a bit like the story of feeding monkeys with dates, where the results of the two groups should not differ significantly!
However, the results obtained from multiple experiments are consistent, showing that the second group of workers performed better than the first group.
This is quite strange, but psychology provides a good explanation for this phenomenon: it involves a psychological law known as loss aversion. For the first group of subjects, 80 yuan is a gain, while for the second group, it is a loss. Compared to equivalent gains, human nature inherently dislikes losses more.
Therefore, the joy we feel from finding 100 yuan on the side of the road does not compare to the sadness of losing 100 yuan.
If we quantify and measure this joy and sadness, abstracting it as utility, we can derive the model of loss aversion in economics: In the model graph, the horizontal axis represents wealth, and the vertical axis represents utility.
This can help us better understand the phenomenon of 'holding onto losses until the bitter end and running away with small profits.'
After opening a position, our emotions are anchored to the account balance at the time of opening. Once there are floating losses, the negative utility feedback from those losses makes us uncomfortable, leading us to stubbornly hold on until we can break even, often resulting in averaging down on floating losses.
When we see floating profits after opening a position, we naturally regard this floating profit as part of our existing equity. Once this equity shows signs of retracement, or even just the thought of a potential retracement arises, our brain's 'loss aversion' mechanism activates, driving us to quickly take profits and exit.
In addition to the psychological perspective, medical research also provides a physiological explanation for 'loss aversion':
There is a part of the brain called the 'amygdala', which is an important structure for emotional learning and memory. Animals with damaged amygdalae react much less to new visual stimuli and lack the ability to recognize and respond to fearful events. When a person may face a loss, the amygdala in the brain becomes active, and those whose amygdala is damaged or inherently insensitive may find it easier to succeed in trading.
Constantly battling against one's own nature is not an easy task.
How do we correct these issues?
Overcoming the 'law of small numbers'：
Don't be swayed by short-term fluctuations; cultivate a perspective that looks at long-term trends. Formulate a trading plan and minimize distractions from market noise.Alleviate the psychology of 'loss aversion'：
Set stop-loss and take-profit points and strictly adhere to them. Use position management to control risk so that your mindset can remain stable.Adjust expectation management：
Stop thinking about guaranteed profits; accept the uncertainty of the market. Learn to hold onto trending positions and don't exit too early.Recognize your own irrationality：
Study behavioral economics to understand your psychological weaknesses. Utilize algorithmic trading or external consulting to avoid emotional interference.