Have you noticed that it's always easy to take profits but hard to stop losses?
Yes, you are not alone; it's hard to decide when to stop loss, but it's easy to take profits, yet often regretting exiting too early. So today, let's talk about why taking profits is easy while stopping losses is difficult.
Take profits for small gains, stop losses for large losses.
Whether for beginners or experts, we all experience 'small gains, large losses,' earning only a few hundred dollars each time, but suffering losses of over a thousand dollars, repeatedly experiencing a return to square one.
Every time you start making a profit, your heart becomes restless: firstly, you hope to make more profit, and secondly, you don't want your profits to shrink. Even if you set an expected profit point, if the market fluctuates slightly and causes a decrease in profit, you will immediately settle and exit, hoping your exit point will be today's highest or lowest point, as only then can you feel your judgment is correct. Sometimes, what was originally a profitable order ends up turning into a loss; after several such experiences, you are further prompted to take the small profit, leading to only small gains.
Relatively speaking, when your order starts to lose money, you may feel indifferent, but as the losses increase, you will, like most others, gamble that it will recover one day, either turning floating losses into floating profits or reducing the losses. You may continue to add positions to lower the cost, adjusting your stop-loss position step by step until you have no more funds to maintain your position. Only after a margin call do you wake up to the realization that you have been fighting against the entire market. Perhaps there were a few lucky times when your holding brought you considerable returns, but there will always be that one time that makes you lose everything.
Moreover, when you continue to hold losing orders, the capital being tied up makes it difficult to engage in other potentially more profitable investments, which means losing overall investment opportunities. This can lead to missed trading opportunities due to the occupied capital and frustration.
After taking profits, the price continues to rise; if you hold on, it immediately drops.
This situation is also very common; every time you take a profit, the market continues to rise, and you regret exiting too early, telling yourself to be patient next time and to wait longer. Unfortunately, when you are ready to continue holding, the market suddenly reverses, not only wiping out your profits but also causing a loss of capital.
Regardless of the situation, it arises because people are more willing to bet on losses rather than gains.
Furthermore, psychologists believe that the 'regret theory' can partially explain this phenomenon. Statman is an authoritative scholar on regret theory, pointing out obvious facts that can be referenced in his 1994 article (Tracking Error, Regret, and Asset Allocation Strategies). According to Statman, we are more willing to bet on losses rather than gains because we are afraid to face the reality of failure.
Applying the above theory to the cryptocurrency market, we can imagine holding onto losing orders, hoping they will recover, so we don't have to admit we made a mistake. After all, the held contracts haven't been closed at a loss; the loss is merely on paper—can you really say I lost? In this case, the vast majority prefer to believe that something might occur to reverse the market direction, leading to a tendency to stop trading and hold steady when positions incur losses.
Additionally, Shefrin and Statman gave an explanation in 1985 for why people are reluctant to stop losses, using the stock market to illustrate. Now, we might as well apply this explanation to the cryptocurrency market.
In general, people trade cryptocurrencies due to cognitive and emotional reasons. They trade because they believe they possess information, when in reality, they only grasp noise. They also trade to gain pride. When decisions are correct, trading brings pride; when decisions are wrong, trading leads to regret. Investors want to avoid the pain of regret, so they hold on to losing orders to prevent actual losses or blame it on current events.
The regret theory, also known as 'risk aversion,' serves as a typical example of self-protective attitudes, explaining why investors find 'stopping losses too difficult.'
Closing a losing order is equivalent to admitting the inconsistency between one's view of the market and the harsh reality of the market.
The mindset for taking profits and stopping losses is different.
When the market trend is consistent with the trader's judgment, orders start to produce floating profits, and this situation is very different: winners have nothing to hide. However, winners face another trap: they are more inclined to believe that their success is the result of personal effort rather than luck. Social psychologists refer to this phenomenon as 'hubris.' At least on average, we are all hubristic.
This theory suggests that many investors attribute their recent gains in the futures market to their superior investment skills. Because they believe they are highly skilled, their operations become more frequent, with some even trying to capture every market fluctuation. Therefore, their eagerness to take profits mainly stems from personal confidence.
Many investors commonly experience the confusion of 'easy to take profits, hard to stop losses.' In fact, this is a weakness of our humanity. To conquer the market, one must first conquer oneself. Profit and loss are common in investing. To achieve long-term profits in the futures market, one must have a correct understanding of profit and loss, which is a prerequisite for establishing a scientific capital management strategy. Before trading, develop a detailed trading plan and strictly execute your trading plan; do not take profits casually when you shouldn't, and do not be 'soft-hearted' when you need to stop losses.
