Recently, I’ve been thinking about a trap that many traders fall into—loss aversion. Simply put, the pain of losing money is much stronger than the pleasure of making money; this psychological bias can directly ruin your trading decisions.

Have you ever experienced this? The stock you bought drops, and you stubbornly hold on, unwilling to admit defeat, instead fantasizing that “the market will reverse.” What’s the result? The loss keeps growing. But in another scenario, you finally make a 10% profit, and with just a slight pullback, you panic and quickly close the position, only to watch the stock continue to rise. That’s loss aversion at work.

The underlying principle is quite simple. Neuroscience has confirmed that when losing money, the brain’s amygdala gets activated, triggering a fear response that directly suppresses the rational analysis of the prefrontal cortex. In other words, your emotions are completely dominating your decisions, not your reason. Even more painfully, the pain from a loss is about 2 to 2.5 times the joy of gains—losing $100 feels so bad that you need to earn $200–$250 to recover.

So you see many traders trapped in a cycle of risk preference imbalance. They prefer low-risk, low-return investments and are afraid to take high-risk, high-reward opportunities, even though the latter is often the better long-term choice. Some are also held hostage by their cost basis; even if the fundamentals of a stock have worsened, they refuse to sell because “they haven’t broken even yet,” which is an overreaction to losses.

How to break this cycle? I think the most effective way is to establish a trading system, write down your stop-loss and take-profit rules, and enforce them with discipline. Don’t let emotions interfere. Also, control the risk per trade, not exceeding 2%–5% of your account, and diversify investments to reduce the impact of individual asset volatility.

More importantly, reconstruct your cognitive framework. View stop-losses as trading costs rather than failures, focus on risk-reward ratios instead of blindly chasing profits. I also keep a record of my emotional state during trades to enhance awareness of my psychological condition.

Ultimately, loss aversion is a common human flaw, but it’s not a reason for trading failure. Accepting losses as part of trading, cultivating patience and discipline, and focusing on long-term trends rather than short-term fluctuations are key to truly reducing the negative impact of loss aversion and improving the quality of your trading decisions.