Author: CryptoPunk
Introduction: Systemic Self-Deception
Stop talking about technical analysis and macroeconomics. The only fundamental reason you're still being exploited by "liquidity" is this:
You are timid as a mouse when you are making a profit, but fearless when you are losing money.
Seeing a 10% unrealized profit in your account makes you panic, fearing you'll lose your winnings, so you quickly cash out. But seeing a 30% unrealized loss, you become calm, close the app, and tell yourself, "As long as I don't sell, it's not a loss."
This isn't called having a good mindset. From a cognitive science perspective, it's a form of systematic self-deception.
Nobel laureate Daniel Kahneman had already given his verdict in "Thinking, Fast and Slow": your brain opens a cheating "mental account" for you in order to maintain a certain psychological balance.
Part 1: The Money That Was "Downgraded"
Why are you unwilling to cut your losses? Because you are living in an illusion woven by your own mind.
In the background of your brain, there are two ledgers:
Cash account: Money used for groceries, meals, and rent.
Mental Account (Positions): The money in this account is defined by you as "game currency".
This is why you might feel upset for a long time if you lose 100 yuan in real life, but remain unmoved when you witness tens of thousands of yuan disappear in a trading app. Because, psychologically, you've already downgraded that money.
When an account incurs a loss, your brain activates an "isolation mechanism": as long as the position is not closed, the loss is just pixels on the screen, it is "floating" and "fake".
The difficulty in cutting losses lies in the fact that it forces you to break down the barriers, converting "paper losses" into "real pain." To avoid this settlement, you choose to bury your head in the sand like an ostrich, trying to prevent this false mental account from collapsing.
Wake up. There are no "paper losses" in the financial world. Every second your market value changes is your current net worth. Your decision not to sell is itself a new buying decision.
(Special Note: This article only discusses one core proposition—why human instinct compels you to make worse decisions when a trade is already going against you. We do not discuss fundamental reversals or systematic positioning.)
Only those who irrationally stubbornly resist based on an escapist mentality will be judged.
Part Two: Biological Instincts in the Face of Loss
Kahneman's prospect theory reveals a more brutal truth: human attitudes toward risk are schizophrenic.
When you make money: you become extremely risk-averse.
Losing money: You become extremely risk-averse.
Faced with a 20% loss, reason tells you to cut your losses and exit the market. But your animal instinct tells you: "Take a gamble! Maybe if I hold on a little longer, I'll break even!"
Once you enter a loss zone, your brain is no longer focused on "maximizing profits" but on "avoiding admitting mistakes."
Here, we must distinguish between two completely different behaviors: one is **"strategic unrealized losses" based on prior rules , and the other is **"emotional stubbornness" based on subsequent resentment **. This article aims to judge the latter.
In the quagmire of losses, to avoid certain losses, you're willing to gamble your entire fortune on a tiny chance of breaking even. At this point, you're no longer a rational trader; biologically speaking, you've entered a typical "loss-chasing" state.
Part Three: Any stop-loss order that requires "on-the-spot decision-making" is ineffective.
If you're still thinking, "Next time I'll definitely use willpower to stop the loss," then congratulations, you'll likely face another margin call next time.
Trying to use "willpower" to fight against biological instincts evolved over millions of years during adrenaline-pumping trading sessions is itself a form of arrogance.
Want to survive? You don't need stronger willpower; you need a set of rules that don't require willpower .
1. There is only "hard stop-loss," not "psychological stop-loss."
If you're still using your brain to remember stop-loss levels, you're just giving yourself a way out. Solution: Set conditional orders when placing your order. Let the exchange's server handle the stop-loss, not your fingers. If you're afraid to set stop-loss orders, it means you've already prepared to bury your head in the sand from the moment you open a trade.
2. Implement an overnight circuit breaker mechanism.
Most people's huge losses stem from the obsession with "not wanting to carry losses overnight," which leads them to sink deeper and deeper. Solution: Set an ironclad rule for yourself—if your account is in the green before the market closes (or before going to bed), unconditionally liquidate half of your holdings .
(Note: This strict rule specifically targets two types of people: 1. Subjective traders who have not conducted complete backtesting; 2. Those who have already experienced significant emotional fluctuations due to losses. Trend trading systems are not included in this discussion.)
Why is this crucial? Because continuity is the fuel of the gambler's mentality, and the essence of a circuit breaker is to sever this continuity. Once the flow of time is cut off, your brain can switch from "recovery mode" back to "rational mode."
3. Redefining "Principal"
Forget about your deposit amount, forget about your cost price.
Solution: Before the market opens each day, write down your current net assets on a piece of paper. This is your principal for the day. If you only have 50,000 left, then think about investing 50,000. Never try to earn back "money you've already lost," because that money no longer physically belongs to you.
Conclusion
The market is not only a place for the transfer of wealth, but also a meat grinder for human nature.
Cutting losses is essentially a counterintuitive "detox." It goes against our instinct to pursue perfection and stings our pride that we don't want to admit defeat.
But remember: your brain is designed for survival, while the market is designed for harvesting.
The market never rewards instinct, but it leaves a way for a few who are willing to exercise self-discipline.
