Risk Academy · Trading psychology
+$20. Closed.-$100. Still open.
Same trader, two positions, opposite reactions. The small win gets closed before it can disappear. The bigger loss gets time to come back. The pattern has a name, the disposition effect, and decades of research behind it.
The +$20 and -$100 are an illustrative example, not real trades.
Why the two feel different
+$20
Fear of losing the profit
An open gain feels like something you can still lose. Closing it turns it into a win you get to keep.
-$100
Hope it comes back
An open loss feels unfinished. Closing it makes it real, so waiting feels like the cheaper choice.
Researchers explain this with prospect theory (Kahneman and Tversky): measured from your entry price, people tend to play safe with gains and take chances with losses. In a trade, playing safe means closing the winner, and taking a chance means leaving the loser open.
What the research found
About 1.5x
On days they sold, investors cashed in 14.8% of the gains they could have taken and 9.8% of the losses: winners about one and a half times as readily as losers.
3.4 points
The winners they sold went on to beat the losers they kept by 3.4 percentage points over the next year, measured against the market.
Both numbers come from Terrance Odean's 1998 study of 10,000 accounts at a large US discount broker, every trade from 1987 to 1993. These were stock investors, not MT5, gold or forex day traders, and the study measures a tendency across thousands of accounts, not the reason behind any single trade. The name itself comes from Shefrin and Statman (1985).
A 2016 study by Rawley Heimer found something that matters on social media: giving traders access to a social trading network nearly doubled their disposition effect.
Taking profit is not the problem
Nothing here says a winner should always be held longer, or that a losing position must always be closed at once. The same action can follow a plan or break one. What changes the result is who decided: the rules you set before entry, or fear and hope after it.
| The move | Plan exit | Fear or hope exit |
|---|---|---|
| Close a winner at +$20 | Your plan's target was +$20, or a rule you set before entry fired (time, news, a level). | The plan said +$60. Price paused, and closing felt safer than watching it come back. |
| Keep a loser open at -$100 | Your stop is still further away, and the trade is inside the risk you sized it for. | The stop was at -$50. You moved it, or removed it, because closing would make the loss real. |
| Close part of a position | Your plan had a partial close at a level, written before entry. | You closed the part that was in profit and kept the part that was not. |
Self-check for your next trade
Before you enter
- Where is my stop, in price and in dollars?
- What closes the trade in profit: a target, a trailing rule, or a time limit?
- What would make me close early, and is it written down?
While it is open
- Has my stop moved further from price since I entered? That is the one move a plan almost never makes.
- If I had no position, would I open this trade here, now?
- Am I about to close because a rule fired, or because a feeling did?
After it closes
- Log one column: exit by rule, or exit by feeling.
- After twenty trades, compare the two groups' results.
Sizing the trade from the stop first makes the stop easier to keep: position sizing. To lock in part of a winner by rule instead of by nerves, see trailing stops and partial closes.
Your plan decides the exit. Not the feeling.
Sources
- Terrance Odean, “Are Investors Reluctant to Realize Their Losses?”, The Journal of Finance, 1998 (Table I and Table VI).
- Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long”, The Journal of Finance, 1985.
- Rawley Z. Heimer, “Peer Pressure: Social Interaction and the Disposition Effect”, The Review of Financial Studies, 2016.
Educational content only, not financial advice. The +$20 and -$100 positions are an illustrative example. Research describes tendencies across many investors, not what any one trade should do.