When profits arise, one wants to run; when losses occur, one stubbornly holds on. This perhaps reflects the most genuine feelings of many cryptocurrency enthusiasts. This phenomenon is known in behavioral finance as the 'disposition effect,' rooted deeply in human nature.
The disposition effect describes investors' tendency to sell profitable assets too early while holding onto losing positions for too long. The core reason lies in people's aversion to loss, which often far exceeds the pleasure derived from gaining an equivalent profit. Studies show that the psychological pain of losing $100 may require a gain of $150 or even more to achieve balance. This asymmetric psychological response often invisibly dominates our trading decisions.
Another key factor is 'cognitive dissonance.' When we buy an asset based on our judgment, but the market trend goes against us, strong internal conflict and discomfort arise. To alleviate this cognitive pain, we often choose to ignore unfavorable information or even double down, trying to prove that our initial decision was correct. This leads to holding onto losing positions and even increasing them, ultimately evolving into an unbearable heavy position.
The dangers of the disposition effect are evident: it causes us to abandon trending profits too early while plunging us deeper into expanding losses. This not only erodes capital but also consumes a significant amount of time and energy, leaving us unable to attend to other better opportunities, entrapped in a vicious cycle of emotions and decision-making.
To overcome this psychological trap, the key lies in establishing a systematic response mechanism. First, clear and quantifiable rules must be set before trading, such as defining specific take-profit and stop-loss levels, and strictly adhering to them. Second, decision-making flexibility must be maintained; the market is always right. Once the trend proves our prediction wrong, we should decisively recognize the mistake and exit, rather than cling to the illusion that 'the market will eventually prove me right.' True trading wisdom lies not only in seizing opportunities but also in having the courage to timely end mistakes.
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