Welcome to the fourth issue of Mind vs. Market: The Trader’s Mind — a series on trading psychology, backed by data.
Last week, we talked about one of the hardest skills in trading.
This week, we’re going after something even more subtle — and far more expensive:
“locking in profit… and holding onto losses.”
It sounds disciplined.
It sounds smart.
But in reality, it’s often just fear wearing a suit.
The uncomfortable math
Let’s make this simple.
If you:
cut losses at -20%
take profits at +5%
You need to be right 80% of the time just to break even.
That’s not trading.
That’s survival mode.
Even top professional traders are only right about 50–60% of the time.
They make money because:
Their winners are bigger than their losers.
Cutting winners early breaks that equation completely.
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A real example (and a painful one)
In early 2023, NVIDIA was trading around $150.
Many bought.
The stock moved to $200 — a solid +33%.
People sold.
“Locked in profits.” Felt good.
But then…
NVIDIA went to $900+ within ~18 months.
A $10,000 position:
Sold early → $13,300
Held → $60,000+
That’s roughly $47,000 lost… by being “responsible.”
Why this keeps happening
This isn’t a skill issue.
It’s human psychology.
1. Prospect Theory (Kahneman & Tversky)
Research shows: Losing $100 hurts about 2× more than gaining $100 feels good.
So when you’re in profit:
You don’t think about upside
You think about losing what you already have
2. The Disposition Effect (Terrance Odean, UC Berkeley)
Study of 10,000 brokerage accounts found: Investors are 1.5× more likely to sell winners than losers
Not because they’re wrong.
Because they’re emotionally wired that way.
3. The Certainty Effect
People prefer:
A guaranteed small gain
Over:
A probable larger gain
Even when the math clearly favors patience.
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The turning point
There’s a moment every trader recognizes:
You see green.
You feel good.
And then… you feel nervous.
What if it disappears?
So you sell.
Not because your thesis changed.
But because you wanted certainty over opportunity.
What actually works
You can’t remove emotion.
But you can design around it.
1. Use trailing stops
Instead of fixed targets:
Let winners run
Protect downside automatically
2. Scale out (not all-in/all-out)
Example:
Sell 1/3 at first target
Sell 1/3 later
Let rest run
You satisfy your brain AND keep upside
3. Stop watching P&L constantly
Every time you see green:
Your brain wants to “secure it”
Less checking = fewer emotional decisions
Key Takeaway
“Locking in profits” feels responsible
But it often costs more than it saves.
Your brain prefers:
small certain gains
overlarger uncertain ones
Even when the math strongly disagrees.
The Number
$47,000
That’s the opportunity cost of one early exit in one stock.
Now multiply that across years of trading.
Next Issue
Jesse Livermore made billions… and his biggest lesson was simple: Trade less. We’ll break down why the best trade is often the one you don’t take.
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