If you’ve ever:
- Held a losing position hoping it would recover
- Closed a winning trade too early for fear of losing it all
That’s no coincidence. Your brain is responding to predictable biases.
Two researchers, Daniel Kahneman and Amos Tversky, studied these mechanisms in depth.
Let me walk you through what you need to know.
Why do traders hold losing positions?
The answer lies in a psychological bias called loss aversion.
It tells us that, to our brains, a loss hurts twice as much as an equivalent gain feels good.
And it’s true: thinking about it, I’d rather gain €1,000 than lose €1,000.
Because of this, when you have an open trade, your brain treats the loss as temporary, something that can still be undone.
Closing the position would mean admitting your mistake and taking the pain. Something you can’t bear.
That explains why you hold on to losing positions.
Why do traders take profits too early?
Here’s the paradox: our attitude to risk changes depending on whether we’re winning or losing.
When you’re in profit, you become very cautious.
It’s like switching into protective mode.
You’d rather close the trade and secure the profit than let it develop, even when the signals are favourable.
That looks rational on the surface, but it stops you making the most of good opportunities.
When you’re losing, the logic flips.
You take more risk to avoid accepting the loss.
Closing the position would mean acknowledging your mistake, which is emotionally difficult.
So you stay in, hoping for a rebound, even when the odds are against you.
Why do traders overestimate probabilities?
We don’t process probabilities objectively.
Our brains dislike uncertainty, especially when a rare outcome could be catastrophic.
Kahneman calls this overweighting small probabilities:
- With gains, we overestimate the chance of success
- With losses, we overestimate the chance of failure
What does that look like in practice?
Given a 1% chance of winning €1,000 or a guaranteed €10 gain, we prefer the shot at €1,000.
Given a 1% chance of losing €1,000 or a guaranteed €10 loss, we prefer to lose €10.
Yet the expected value of each option is the same: €10 in the first case and -€10 in the second.
What can you do about it?
I wasn’t going to leave you without solutions...
As a trader, you need realistic profit targets so you don’t rush. You also need a take-profit and a stop-loss on every trade so you don’t hang on too long.
Of course, the take-profit must fit your analysis, and the stop-loss should sit where your trading idea is invalidated.
The aim is to stop emotions taking over your decisions.
Yes, it’s that simple. But putting it into practice isn’t easy, because we want to win as much as possible while avoiding losses.
I’ve used simplified examples to illustrate Kahneman and Tversky’s ideas.