Lessons › Why traders lose › Selling winners, holding losers
World 11 · Why traders lose · lesson 22 · level 2
Selling winners, holding losers
People tend to sell winners too soon and hold losers too long, and in 10,000 real accounts the winners they sold beat the losers they kept by about 3.4 points over the next year.
In one line
You take profits fast and give your losers time. It feels balanced, but a study of 10,000 real accounts says it is backwards.
Explained simply
Selling winners too soon and holding losers too long has a name: the disposition effect. A win feels good, so you lock it in. A loss hurts, so you avoid making it real. A researcher followed 10,000 real accounts from 1987 to 1993. A stock sitting at a gain was about 50% more likely to be sold than one sitting at a loss. Over the next year, the winners they sold beat the market average by 2.35%, and the losers they kept trailed it by 1.06%. They sold the wrong ones and kept the wrong ones.
A worked example
An example with the study's numbers: the winners people sold went on to beat the market by 2.35%, and the losers they kept fell behind it by 1.06%. The gap is 2.35 + 1.06 = 3.41, about 3.4 percentage points in favor of the ones they sold.
Mistakes to avoid
- Taking a small profit fast because the win feels good.
- Holding a loser because selling would make the loss real.
- Telling yourself "it is not a loss until I sell".
- Moving your take-profit or give-up price because of a feeling.
Check yourself
What is the disposition effect?
Selling winners too soon and holding losers too long. A win feels good, so you lock it in. A loss hurts, so you avoid making it real.
In 10,000 accounts, how did the chance of selling a stock at a gain compare with one at a loss?
About 50% more likely. A stock at a gain was sold about 1.5 times as often as one at a loss, and the researcher ruled out the usual excuses.
Over the next year, how did the winners people sold compare with the losers they kept?
The winners sold did about 3.4 points better. The winners sold beat the market by 2.35% and the losers kept trailed it by 1.06%: a gap of about 3.4 points. They sold the wrong ones and kept the wrong ones.
You open a trade with a give-up price 2% below and a take-profit 4% above. Price rises 2% and you want to sell. What now?
Leave both exits where you set them. You set both exits when you felt nothing. Selling early because a win feels good is this habit coming back.
After you sell, your old winner rises another 3%. The loser you kept falls another 1%. How many points better did the sold one do?
4 points. +3 against −1 is a gap of 3 + 1 = 4 points. The study found this kind of gap across 10,000 accounts: about 3.4 points.
Goal of this lesson: Set both exits, your give-up price and your take-profit price, when you open a trade, and then leave them alone.