*****David Blair, The Crosshairs Trader, is a blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading. Below is his latest post for the SMB trading community.***** — Editor’s Note
I was introduced to trading by a good friend of mine years ago. Although Johnny has since passed on, having lost his hard fought battle with cancer, I am and always will be grateful that he introduced me to the trading game. As with most of our experiences with others I learned much from my friend about what was important but I also learned quite a lot about what was not. Let me explain.
Johnny believed we needed to act like a sponge, soaking up as much market knowledge as possible. We did so by studying multiple time frames, becoming intimate with all the popular indicators, reading all the popular books on technical analysis, attending local seminars, purchasing the latest CD series on this or that subject related to market analysis, paying for on line services, etc. The list can go on and on. Most of us have followed (or are following) this course. While Johnny was fully immersed in the latest (and greatest) indicator or chart pattern study from week to week I began to step away from the “soaked sponge” mentality, choosing instead to eliminate from my decision making much of what we had studied. Johnny couldn’t do it. He informed me that he could not accept that the years of time and money spent could be so easily swept aside as waste. I chose not to see it as a waste but as a valuable lesson in learning what matters and what does not; of learning about where not to waste time (and money) in the future.
Just because much time (and money) has been spent on a project with little to show for it does not necessarily mean it is a waste. What is a waste is to continue to do so as a way to “save face”. It’s the “I have spent so much time and money on this I just cannot quit now. It will have been all for nothing.” Psychologists have a fancy term for this process. It’s called the Sunk Cost Fallacy. Traders fall for it in their analysis and in their trading decisions. The former when refusing to give up on finding the “sure thing”; the latter on refusing to give up on a losing trade after all of the time spent on the analysis preceding it.
The following articles should better help you understand the need to let go of what does not matter regardless of the time and money spent.
“Your decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it.”
“We fall victim to the sunk cost fallacy because we are emotionally invested in whatever money, time, or any other resource we have committed in the past.”
“Admitting failure isn’t easy, but sometimes it’s the least costly way out of a poor investment.”
“People with investments in a dying company will often tell themselves that they can’t pull out now because they have too much invested in it – and then they lose everything.”
“You should be looking forward and making your decisions based upon what is before you and not what is behind you.
“Research shows that a person is less likely to reverse a decision which has already cost them a high investment of personal resources.”
“The problem is that investors seem to have different sets of rules, one for new or marginal investments, and one for existing investments.”
“Because we don’t want that money, time, and effort we’ve put in to go to waste, the sunk cost effect compels us to stubbornly follow through on things that are not only no longer helping us, but have actually begun to hurt us.”
By learning to let go more often we may actually find we have much more to gain.
THE CROSSHAIRS TRADER
no relevant postions.
sunk cost effect is responsible for not letting go of losing trades….