Loss aversion describes the tendency to experience the impact of a loss more strongly than an equivalent gain. In trading it can appear as taking winners too early, holding losers too long or moving stops to avoid realising a loss.
Patterns to look for
- Average winner materially below what the plan implies.
- Losses that frequently exceed initial risk.
- Stops moved farther away after entry.
- Early exits from winners without a defined condition.
- More manual intervention when a position moves negative.
Use MFE and MAE
Maximum favorable and adverse excursion can help review management. If many winners are closed early and then continue in the intended direction, check for excessive protection. If losses exceed planned levels, review how stops were managed.
Compare in R
Expressing outcomes in risk units makes trades with different monetary size easier to compare. Review the relationship between average win, average loss and planned risk.
Define decisions before entry
Stops, targets, partial exits and exit conditions should be defined before floating P&L starts influencing the decision. Adaptation can still be valid, but it should follow pre-defined criteria.
Review exceptions as well as averages
Find trades where actual risk clearly exceeded planned risk or where potential profit was cut without a rule. Those exceptions often reveal the pattern more clearly than the global average.