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Why did I hold on too long – The Endowment Effect
Trading is a business that is based upon one single component more than anything – process. Being a process driven task, there simply is no room or place for emotion, if you want to be successful.
One emotion that can be a real problem, particularly for the newer trader is what psychologists call the Endowment Effect.
What is the endowment effect
The endowment effect prompts us to value or think differently about something when we own it, compared to if we didn’t. As soon as something is personalised in this way – we think about it differently, we treat it differently and most dangerous of all, value it differently. Think about selling a second hand car – the value you place on it will almost certainly be greater than what a prospective buyer may place on the vehicle. Chances are, they are being more objective than you! Interestingly, this is also something that will show up in your journaling too.
How can it impact on your trading?
In a nutshell, the endowment effect is a silent assassin for the trader. Holding on to a position for too long, even when you know you shouldn’t, would be one such example. Waiting that extra day just to see what happens because you can’t bare the pain of selling for a loss today is a very slippery slope and ultimately one which will finish your career as a trader.
Objectivity in your analysis and trade management is critical and by banishing the endowment effect from the hazards that could trip you is a massively positive step in the right direction.
How can you break through it?
When it comes to position management, all of the decisions in regard to price levels ie entry exit and stop/loss should be clear prior to placing the order and the position is not yet in your account. That way, you are far more likely to be objective. From there, sticking to the game plan is key – the only revision to the strategy will be to tighten stops and revise profit targets – never actions to increase risk on the trade. Getting past this hurdle comes down to building your trading muscles – through practise and of course plenty of trades. The free training video here will give you a good basis to get going!
Mindset Mastery Course
NOTE: This video is just a sneak peak into our Mindset Mastery Program. What does your trading plan look like? What does the equity line of your trades look like? Is your trading strategy adequately represented in your account? If you’re ready to take the steps to developing a solid trading plan or at least are curious about how others have done it, you can access the full Mindset Mastery Program by clicking here