Key points 🔸🔹🔸
🟠 This is the third installment of Thinking Up and Down - a blog series exploring the psychological patterns that influence trading behavior.
Anchoring bias drives traders to cling to arbitrary price points while the sunk cost fallacy keeps them in losing positions, making it difficult to exit a bad trade.
🔴 To maintain objectivity, set your exit before entering the trade, use stop-loss orders, track your decisions with a trading journal, and ask questions like: Will I continue to buy this today?
🟠 Let's say you bought a token for $50, but it is now barely holding at $20. Instead of reassessing your situation, your mind keeps returning to the original price. You convince yourself that it will go up - after all, you put in the necessary effort, invested your money, and believed in the project.
🔴 If this sounds familiar, you are not alone. In this episode of "Thinking Up and Down," we explore how anchoring bias establishes a fixed reference point and how the sunk cost fallacy exacerbates the situation, making it difficult to exit a losing trade. We will analyze the psychological factors behind these mental traps, how they affect the world of cryptocurrencies, and how to break this cycle before it costs you more.
🟠 The psychology of holding on for too long
Blame the setup, not willpower. The tendency to hold onto losers for too long is not just a personal trait; it is something inherent, often driven by anchoring bias and the sunk cost fallacy.
🟤 Anchoring bias creates a trap. It occurs when we cling to an initial reference point - like the entry price of an asset - and consider it a benchmark, even as circumstances change. This attachment may prevent us from making objective re-evaluations, as new information is filtered through the lens of that original number.
🔴 Then, the sunk cost fallacy reinforces this attachment. Once we have invested time, money, or energy into something, we feel lost when letting go. These instincts are ingrained in us because we have learned that giving up is failure and perseverance is a virtue, so we continue, bypassing rational evaluation even when a fresh start would be better for us.
🔴🟠 After investing time, money, or effort, we feel pressure to stick with the decision - not because it still makes sense, but because letting go means accepting the loss of those resources. This emotional attachment to past investments can override rational evaluation.
🟠 These biases reinforce each other: one distorts our judgment of value, while the other makes it difficult for us to exit. This irrational commitment leads to an inability to get out of bad positions, meaning that small mistakes turn into larger losses.
🔴 Case studies in cryptocurrencies
Imagine you bought a token for $50. Over the next few weeks, its price drops to $42, then $35, then $20. You try to stay calm despite the decline: "It will go up again! It was $50 before, so it should recover." This is anchoring bias in action - your mind is so focused on your original entry point that it ignores the discipline to reassess your situation, even when market conditions or fundamentals clearly change.
🔴 You may be starting to realize that the fundamentals have changed. You are beginning to reassess your situation, and for a moment, reducing your losses seemed like a rational step.
In the moment, that familiar inner voice intervenes - sly and persuasive: "Think of everything you have already spent." Suddenly, selling feels like a waste, a betrayal. This is the sunk cost fallacy. It turns past effort into justification, steering you away from logic towards emotional thinking. Your conviction is no longer based on data, but on the weight of what you have already spent.
Anchoring bias plants the seed, and now the sunk cost fallacy waters it. Together, they bind and constrain you - in hopes of a recovery that may never come. What began as a strategic trade gradually transforms into stubborn attachment, even as it drifts away from your goals or market reality. The emotional weight of past choices makes it difficult to exit, even when logic is clear. Ironically, the longer you hold on, the greater your losses.
🔴🔴 Stepping away from losers
1️⃣ The first step to avoiding biased decisions is to determine an exit point before entering any trade, and to avoid guessing when emotions inevitably escalate. Trading psychology expert Mark Douglas emphasizes the importance of accepting risk before entering any trade, mentally preparing yourself for all outcomes. One way to do this is to pre-commit to a stop-loss point. Tell yourself, "If this trade hits my stop-loss point, I will be completely fine with that outcome." This kind of pre-commitment helps reduce the emotional temptation to change stop-loss points during market fluctuations.
👋 If you think you might hesitate in a moment of impulse, consider using stop-loss orders to automate your exit and help you stick to discipline. By planning your exit in advance and committing to it, you will stay grounded in logic - not emotion - even in times of market turmoil.
🔴 Keeping a trading journal improves your decision-making process. Note why you entered this position, what you expected, and how things went. Over time, this helps you uncover your thinking patterns, distinguishing between effective strategies and emotional choices.
It is also important to recognize when cognitive biases start to affect your decision-making. If you find yourself thinking, "I have already invested so much," pause for a moment. This is the sunk cost fallacy. Ask yourself: Is this trade still aligned with my goals today? If you find yourself thinking, "It will return to my entry price," that is anchoring bias. Instead, ask yourself: What does the current data say about its prospects?
🔴 It may also help to do a quick mental check 🧠 Would I buy this asset today? If the answer is no, that is a sign that your bias may be behind your decision, and it is time to consider 🧠 letting it go.
👋 More importantly, allow yourself to let go of trading. Exiting a losing trade is not a failure; it is a smart and strategic step. Cutting losses early protects your capital, preserves your mental energy, and allows you to focus on better opportunities in the future.
🔴 Final thoughts
In volatile markets, clarity is essential. The sunk cost fallacy and anchoring bias are subtle - they often seem logical, even noble. But if left unchecked, they can quietly ensnare you in trades that no longer align with your goals.
The best traders are not those who never lose, but those who know when to change course. They recognize when a position no longer makes sense, resist emotional attachment to past decisions, and make their choices based on current reality.
💬👁️🗨️ Additional readings $BNB
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