#RiskRewardRatio Imagine purchasing shares of a company at $10 each. Soon after, the stock price begins to fall and hits $8. This is where psychology starts to play a major role:

Fear of Loss: Many traders in this scenario may panic, fearing further declines. This fear can push them to sell at $8, locking in a $2 loss per share.

Loss Aversion: This cognitive bias causes the pain of losing money to feel more intense than the joy of making the same amount. As a result, the urge to cut losses quickly can become overwhelming.

Hope: On the other hand, some traders may hold onto their shares, hoping the price will bounce back. They might dismiss warning signs and focus only on news or data that supports their belief — a classic example of confirmation bias.

Denial: Others may refuse to accept that their investment decision was flawed, convincing themselves the drop is just a short-term dip.

What happens next?

If the company recovers and the stock climbs to $12, the trader who sold out of fear misses the chance for a profit. Meanwhile, the hopeful trader who held on may end up breaking even or gaining — but they also risked deeper losses if the decline had continued.

The takeaway:

This example highlights how powerful emotions and psychological biases can influence trading decisions — often in irrational ways. Developing the ability to recognize and control these impulses is essential for long-term success in trading.