Author: CryptoPunk
Introduction: Systematic Self-Deception
Stop talking about technical analysis and macroeconomics. The reason you are still that "liquidity" being harvested is simple:
You are timid when you are in profit, yet fearless when you are in loss.
Watching your account float up 10%, you panic, fearing the cooked duck will fly away, and quickly cash out; watching your account float down 30%, you become calm, close the software, and tell yourself, "As long as I don't sell, this isn't a loss."
This is not called having a good mindset. From the perspective of cognitive science, this is a form of systematic self-deception.
Nobel laureate Daniel Kahneman has already given the verdict in "Thinking, Fast and Slow": your brain has set up a cheating "mental account" to maintain a certain psychological balance.
Part One: The "Downgraded" Money
Why are you unwilling to cut losses? Because you live in the illusion woven by your brain.
In the background of your brain, there are two ledgers:
Reality Account (Cash): Money used for buying groceries, eating, and paying rent.
Mental Account (Positions): The money here is defined by you as "game currency."
This is why you feel frustrated for losing 100 yuan in real life, but can remain indifferent when witnessing tens of thousands of yuan evaporate in trading software. Because on a psychological level, this money has already been downgraded by you.
When your account shows a loss, your brain activates the "isolation mechanism": as long as you don't close the position, this loss is just pixels on the screen, it is "floating," it is "fake."
The difficulty of cutting losses lies in the fact that it forces you to break the isolation and convert "floating losses" into "real pain." To avoid this settlement, you choose to bury your head in the sand like an ostrich, maintaining this false mental account from collapsing.
Wake up. In the financial world, there is no "floating loss"; every second of market value is your current net worth. Not selling is itself a new buying decision.
(Special Note: This article only discusses one core proposition—why human instincts force you to make worse decisions when trading has already turned against you. We do not discuss fundamental reversals or systematic positions,
only judging the irrational stubbornness based on avoidance psychology.)
Part Two: Biological Instincts in Loss
Kahneman's prospect theory reveals a harsher truth: human attitudes toward risk are schizophrenic.
When you make money: You become extremely risk-averse.
When you lose money: You become extremely risk-seeking.
Faced with a -20% loss, rationality tells you to cut losses and exit. But your animal instincts tell you, "Take a gamble! Holding on a bit longer might get you back to break-even!"
Once you enter the loss zone, your brain no longer serves to "maximize gains," but rather to "avoid admitting mistakes."
Here, it is essential to distinguish between two completely different behaviors: one is based on pre-established rules, "strategic floating loss," and the other is based on post-fact regret, "emotional stubbornness." This article aims to judge the latter.
In the quagmire of losses, to avoid certain losses, you are willing to bet your entire fortune on a tiny chance of recovery. At this point, you are no longer a rational trader; biologically, you have entered a typical "loss chasing" state.
Part Three: Any Stop Loss That Requires "On-the-Spot Decision" is Ineffective
If you are still thinking, "Next time I will definitely rely on willpower to cut losses," then congratulations, you will blow up your account next time.
In the adrenaline-fueled trading periods, trying to use "willpower" to fight against biological instincts evolved over millions of years is itself a form of arrogance.
Want to survive? You don't need stronger willpower; what you need is a set of rules that do not require willpower.
1. Only "Hard Stop Loss," No "Psychological Stop Loss"
If you are still trying to remember stop-loss levels with your brain, you are leaving yourself an escape route. Solution: At the same time you place an order, you must set a conditional order. Hand the stop loss over to the exchange's server, not to your fingers. If you are afraid to set a stop-loss order, it means you have already prepared to be an ostrich from the moment you opened the position.
2. Implement "Overnight Circuit Breaker Mechanism"
Most people's significant losses come from the obsession of "not wanting to carry losses overnight," leading to deeper entrenchment. Solution: Set a strict rule for yourself—if the account is in the green before the market closes (or before sleeping), unconditionally liquidate half.
(Note: This strict rule is specifically aimed at two types of people: 1. Subjective traders who have not undergone complete backtesting; 2. Those who have shown obvious emotional fluctuations while already in loss. Trend trading systems are not included in this discussion.)
Why is this crucial? Because continuity is the fuel for gambler's psychology, and the essence of a circuit breaker is to cut off this continuity. As long as the flow of time is interrupted, your brain can switch from "recovery mode" back to "rational mode."
3. Redefine "Principal"
Forget your deposit amount, forget your cost price.
Solution: Write down your current net assets on paper before the market opens each day. This is your principal for today. If it is only 50,000, then think in terms of a position size based on 50,000. Never try to earn back "the money you have already lost," because that money no longer physically belongs to you.
Conclusion
The market is not only a place for wealth transfer but also a meat grinder of human nature.
Cutting losses is essentially an anti-human "detox." It goes against our instinct to pursue perfection and pricks our pride of not wanting to admit defeat.
But remember: Your brain is designed for survival, while the market is designed for harvesting.
The market never rewards instinct, but it leaves a path for those few willing to self-restrain.
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