Why is it so difficult to cut losses?
I don't know if anyone has encountered the same problem. Everyone knows that cutting losses is very important, but when the critical moment comes, it's hard to take action!
A very important aspect is the psychological factors at play. First, there's the fear of admitting defeat. Once a position is established, the mind is filled with expectations, hoping for a market reversal and for profits. Cutting losses means admitting one’s judgment was wrong, which many investors find hard to accept. Thus, we choose to endure, hoping for a miracle, but often end up facing even greater losses.
Secondly, there is the greed mentality. When there are losses on the books, we often think, 'Just wait a little longer; maybe we can break even or even make a profit.' This greed blinds us to risks, causing us to miss the best opportunity to cut losses.
Furthermore, there is the mentality of luck. 'Just wait a little longer; maybe the market will reverse.' This mentality of luck is very common. We often overestimate our ability to predict market reversals, while the market is ruthless and won't change its trend because of our hopeful thinking.
The above three points are mainly psychological. On the other hand, they are influenced by cognitive biases. First, there's overconfidence in market predictions. Many investors believe they can predict market trends and set their stop-loss levels based on their predictions. However, the market is complex and uncertain, and our predictions are often unreliable.
Secondly, there's the sunk cost fallacy. The time, energy, and capital already invested make it hard for us to let go. We always feel that since we've already invested so much, holding on a little longer might recover the losses. However, sunk costs cannot be recovered, and continuing to invest will only increase the losses.
Another major aspect is the lack of a clear trading plan and discipline. Ordinary traders generally do not have a clear stop-loss strategy. Many investors do not have a definite stop-loss plan when entering a trade, or if they do, it is very vague. As a result, when the market fluctuates, it becomes difficult to decisively execute the stop-loss.
Additionally, there is a lack of discipline. Even if a stop-loss plan is made, it is difficult to execute it strictly due to emotional influences during actual operations, leading to stop-loss levels becoming meaningless.
In summary, the inability to cut losses in a timely manner is mainly caused by psychological factors, cognitive biases, and a lack of a clear trading plan and discipline. 90% of people do not lose to technique; they lose due to not daring to act against themselves. Next time you consider holding on a bit longer, ask yourself whether it’s faith or the cowardice of not daring to admit a judgment error.
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