Human nature debug: Let's talk about the irrational "carry the order" mentality 🔒

I previously discussed a similar concept in the quote below, and today I would like to talk about it again.

I am often asked, "Do you have any recommended reading lists or materials?"
Basically, my answer will inevitably include behavioral finance📒.

Behavioral finance approaches from the perspective of psychology, pointing out the irrational behavior of people when facing the market.
For me, I would occasionally take it out to review and reflect on myself.

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Last time it was mentioned: "The pain of losing 1 yuan requires earning 2.44 yuan to offset."

Since human nature is inherently reluctant to admit mistakes, closing a position is equivalent to "bowing down and admitting fault."
This has led to retail investors who are new to the market easily experiencing a "hold a losing position" situation.

The attached image is taken from Teacher Lin Meizhen's book "Behavioral Finance". From the above image, we can see:

1️⃣ When holding a profitable position, the speed of "value" increase is slower (the absolute value of the slope is smaller).
When holding a losing position, the speed at which the "value" decreases is faster (the absolute value of the slope is larger).
It is worth noting that: in Area A, the absolute value of the slope begins to decrease‼️

In plain language:
1️⃣ When making a profit, the speed of value growth is relatively slow; when in loss, it decreases faster.
"Compared to the happiness brought by making money, the pain brought by losing money is greater."
2️⃣When floating losses reach a certain level, people are even less willing to cut losses,
What is presented in the chart is that "the absolute value of the slope in Area A begins to decrease."

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Regarding the second point, this is not difficult to understand; you can imagine:
If the product you bought has already dropped by 80%, would you really want to cut your losses?

In other words, once the loss on the position is too large,
will cause people to develop a mentality of "since I've already lost so much, what's a little more."
causing a greater disregard for the potential risk of continued decline⚠️

In the process of trading, regardless of the time, the attitude towards risk should be consistent.
Once decision-making is distorted due to the intervention of mindset and emotions, it becomes irrational behavior.

Of course, if it were me, if my position had already lost more than 80%,
I also experience the mindset mentioned above, this is human nature.

Therefore, the best solution is to "discipline to execute stop-loss."
Once the losses have expanded and the aforementioned mindset appears, one will be even more reluctant to cut losses.

📖 Related reading resources: risk control, position management, scientific stop-loss setting

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We are all human, and we share similar human nature, and the emotions brought about by human nature,
is one of our biggest enemies in the financial markets👾

Knowing yourself and knowing your enemy, you will not be defeated in a hundred battles. Behavioral finance can help us become more familiar with our enemies.

Reiterate: At any time, we should not let emotions interfere with trading decisions.
Whether to buy is unrelated to your cost price;
Whether to sell or not has nothing to do with your cost price.
The only factor that determines whether to buy or sell is related to expectations about the future of the product‼️

Choosing to hold a position may be because "you believe it will rise",
But it definitely shouldn't be because of "I am unwilling to accept it" or "It's already down 80% anyway."

Let us encourage each other.