What is the Disposition Effect?
Disposition Effect
Forex Trading Glossary
Quick Answer: The disposition effect is the bias of selling winners quickly while holding losers too long in hopes of recovery.
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.
Overcome the Bias
Predefine exits, trail stops systematically, and set performance rules that reward following the plan over outcome bias.
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.
Related Terms
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