What is the Disposition Effect?

What is the Disposition Effect?

The disposition effect describes the tendency to sell winners too early while holding losers too long, driven by the desire to lock in gains and avoid realizing losses.

Behavioral Drivers

• Loss aversion: Pain of loss outweighs pleasure of gain.
• Regret avoidance: Traders hope losers will rebound.
• Overconfidence: Belief that the original thesis remains valid despite evidence.
• Mental accounting: Treating each trade as an isolated outcome rather than part of a portfolio.

Action Steps

• Use targets and stops: Automate exits to remove hesitation.
• Review metrics: Track average win and loss to highlight imbalance.
• Reframe mindset: Treat taking a stop as accepting new information.
• Build habits: Celebrate disciplined trades regardless of result.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.