Have you ever caught yourself staring motionless at the monitor while your trade goes deep into the red? Thoughts swirl around in your head: “It’ll turn around now,” “The market is just removing liquidity,” “I can’t close now, it hurts too much.” You enter a state of “freeze.”
The problem is not a lack of knowledge. The problem is that at this moment, your body is controlled by the ancient limbic system, which doesn’t care about your trading plan.
First Factor – the neurobiology of pain: Why a “minus” on your account hurts
MRI studies show a striking fact: when a trader records a loss, the same areas of the brain are activated as during physical trauma – the anterior insular cortex and the anterior cingulate cortex.
For your subconscious, closing a losing trade is no different than hitting your finger with a hammer. The brain perceives the loss of money as a threat to survival. That is why a defense mechanism kicks in – denial. We subconsciously ignore negative information (red numbers) and look for any positive signals (rebounds on the 1-minute chart) to avoid the “physical” pain of recording a loss.
Second Factor – the “loss aversion” trap
Nobel Prize winners Daniel Kahneman and Amos Tversky proved that the pain of losing $1,000 is twice as severe as the joy of receiving the same $1,000. In trading, this manifests itself in behavioral asymmetry:
- When we have a profit, we become risk-averse (we close the position too early so as not to lose what we already have).
- When we have a loss, we become risk-addicted (we start to take even more risks, average out, and hope, just so we don’t have to admit defeat).
This is an evolutionary bug. In the wild, losing a resource (food) could mean death, while acquiring extra resources was simply a pleasant bonus. On the stock market, this instinct works against you.
Third Factor – the freeze response
In biology, there are three responses to stress: Fight, Run, or Freeze. When the price moves against you, you cannot “fight” the market or “run away” from it (if you are already in a position). That leaves the third response – freeze. In this state, the neocortex (the rational part of the brain) shuts down. You lose your ability to think logically. You just watch your deposit melt away, hoping for a miracle. This is psychological “freezing.”
Why “Hope” Is Not an Emotion, But a Cognitive Trap
When a position goes into the red, the brain triggers defensive distortions:
- Decision avoidance effect (“Until I close the deal, the loss doesn’t seem real.”)
- The illusion of control (“I can still do something; the market is just temporarily against me.”)
- Substituting probability with history (“The market has fallen before and then recovered, so it will recover now.”)
It is important to understand that hope in trading is not faith, but a form of denial.
Why Does Willpower Not Work in This Case?
1. Biological “safety valve”: Willpower is a limited resource
Willpower (or self-control) is a function of the prefrontal cortex of the brain. The problem is that this part of the brain consumes a tremendous amount of energy (glucose).
When you trade all day, analyze charts, and make decisions, your “supply” of willpower is depleted. This is called ego depletion. At the moment when the price goes against you, and you need to press the close button, the prefrontal cortex may simply be “depleted.” At this point, control is taken over by the amygdala — the ancient center of fear, which is not capable of logic, but only of survival.
Trying to close a loss with willpower is like trying to lift a 200 kg barbell after a marathon. Your resources are simply exhausted.
2. Cognitive dissonance: Willpower protects your rightness
Willpower is often directed not at following rules, but at protecting our ego. When you open a trade, you create a “hypothesis” about the world (for example: “The dollar will rise”). If the price falls, cognitive dissonance arises: your beliefs clash with reality.
At this point, willpower begins to work “against” you: it is spent on finding excuses why you are right, and the market is wrong. You exert willpower to endure the pain instead of stopping it.
3. Narrowing of consciousness
When you experience a sudden loss, your body releases cortisol and adrenaline. These hormones put your brain into “tunnel vision” mode. Your consciousness narrows to a single point – the red loss figure.
In a state of acute stress, higher cognitive functions (including willpower and long-term planning) are physiologically shut down. Blood flows away from the prefrontal cortex to the muscles (preparing to run or fight). You literally become stupid in a moment of deep loss. Demanding willpower from a person in this state is like demanding a drowning person solve math problems.
Practical advice: Don’t train your willpower, train your discipline.
How to Trick Your Instincts: Rigid Exit Algorithms
Since we cannot change the biology of the brain, we must change the environment in which we make decisions. Here are four techniques that help circumvent neurobiological traps:
A. The “Paid Admission” principle
Stop thinking of stop losses as losses. Think of them as the cost of admission to participate in a trade. In business, you pay for rent and salaries – these are not losses, they are expenses. Stop losses are a trader’s operating expenses. If the price hits your stop, it means your “ticket” has expired and you need to leave the room.
B. The “Automatic Executioner” rule
Never set a stop loss “in your head.” Your limbic system will always persuade you to wait another 5 minutes. Only use hard server orders. The correct stop loss:
- is set before entry,
- is calculated based on market structure, not pain,
- is not discussed after entry.
C. The “Temporary Stop Loss”
If the price does not move in your favor within X bars (or hours), close the trade, even if the stop loss has not been triggered. A “stuck” position is mental poison. It eats away at your cognitive energy, even if the price remains unchanged.
D. The “Distancing” technique
Think of risk not in dollars, but in R (units of risk). A loss of $500 sounds painful. A loss of “1R” sounds like dry statistics. The less you associate the numbers on the screen with real purchases (a new phone, a vacation), the weaker the reaction of the insular lobe of the brain will be. Many traders remove “dollars” from their results, leaving only points and ticks.
E. Preliminary acceptance of loss
Professionals mentally do the following: “I’ve already lost this money. Now let’s see if the market will give us a profit on top of that.” This greatly reduces emotional stress and the fear of fixation.
Practicum by Kahneman and Tversky: How to “reprogram” Thinking
In his book “Thinking, Fast and Slow”, Daniel Kahneman divides our brain into two systems: System 1 (fast, intuitive, emotional) and System 2 (slow, logical, effortful). Trading on “System 1” is a path to bankruptcy.
Here are some specific methods based on their theory that will help you close losing trades in time:
1. The outside view technique
Kahneman found that we tend to have an “inside view” – we consider our trade to be special.
Tip: When you are sitting on a loss, ask yourself, “If I saw this chart for the first time and didn’t have an open position, would I buy here?” If the answer is “no,” close immediately. Tversky called this “eliminating attachment to the past.”
2. Overcoming the endowment effect
We value what we already own more than what we don’t have. Once you’ve opened a trade, you’ve “fallen in love” with it, and parting with it (closing at a loss) becomes twice as difficult.
Tip: Use the “Replacement Test.” Imagine that due to a technical glitch, your losing position closed on its own right now. Would you open it again at the same price? If not, you are only holding on to it because of the “endowment effect.”
3. Abandoning “mental accounting”
Tversky and Kahneman described the concept of “mental accounting.” We open a separate “account” in our heads for each transaction and desperately do not want to close it with a negative balance.
Tip: Group trades into series. Don’t evaluate the result of a single trade. Tell yourself, “My trading plan consists of 20 (50, 100) trades. This particular trade is just statistical noise.” When you look at your overall capital (equity) rather than a single “bleeding” position, the pain of fixing a loss is reduced. In hedge funds, a strategy is evaluated over a minimum of 100 trades.
4. Fighting the “Sunk Cost Fallacy”
This is the most dangerous: the more time and money we have invested in a position, the harder it is for us to abandon it. We “punish” ourselves by continuing to sit on a loss, hoping to justify past costs.
Tip: Kahneman recommends making decisions based solely on future prospects, completely ignoring how much you have already lost. Past money is gone forever. The only question that matters is, “Where will my capital be most useful in the next 4 hours?”
5. Using “Premortem”
To ensure that your willpower does not let you down at a critical moment, Kahneman advised using “Premortem.” Before opening a trade, imagine that it has already closed at a stop loss and resulted in a loss. Ask yourself, “Why did this happen?” When you experience the losing scenario in advance, it ceases to be a shock to the brain, and “System 2” retains control over the “Close” button.
Final Word
Trading is an unnatural activity for humans. Our brains have not evolved to trade on Forex. To become a professional, you need to stop fighting the market and start fighting your biology.
Remember: a professional trader is not someone who is always right, but someone who can admit when they are wrong quickly and painlessly. Train your brain to understand that a stop loss is not a defeat, but your main protection against bankruptcy.