Process and psychology
Trading after a loss
Risk taking after losses can rise, and a rule set in advance protects against it.
Some studies find something and others do not, or the result depends on the exact rule.
Documented in professional traders. Retail forex evidence is thin, and claims with specific percentages from blogs were not traceable.
What it is
Chicago Board of Trade proprietary traders with morning losses were more likely to take above-average risk in the afternoon. Evidence for retail forex is thinner.
What it suggests
A cooling-off rule is a plan for a moment in which the trader expects to be poorly placed to decide.
How to check it
Write the pause after a loss or after N losses in the plan and have the journal note when it was and was not kept.
Common mistakes
- Trading immediately to get the loss back.
Sources
- Coval and Shumway (2005), Do behavioral biases affect prices? Journal of Finance 60(1) (Chicago Board of Trade proprietary traders) (citation and headline finding only)
Related lessons
Written in our own words. Education only, not financial advice.