The Disposition Effect in Your Own Data

[Fairman]

The Disposition Effect in Your Own Data

The disposition effect is the tendency to sell winners too early and hold losers too long. It appears in professional and retail investors alike, and in forex it shows up as a distinctive pattern in the numbers.

To test whether it affects you, compute three things from your journal. First, average win in R compared with average loss in R. If your wins average 0.8R and your losses average 1.2R, you are cutting winners and letting losers run beyond the plan. Second, the share of trades where you exited before the target. Third, the share of losing trades where you moved the stop or removed it.

Some version of this appears in most traders' records. The reason is emotional: realizing a gain feels good, and realizing a loss feels painful, so people act to lock in the good feeling and avoid the bad.

Countermeasures work best when they are mechanical. Place stops and targets as orders when you enter, so exits happen without a decision. Limit changes to stops to one direction only, toward reducing risk. Predefine partial profit rules. Review weekly with the numbers in front of you.

Reducing position size can also help, because lower stakes weaken the emotional pull.

Track your average win and loss in R weekly, and watch the ratio change as discipline improves.

Practical step: calculate your average win in R and average loss in R, and write the difference as a target for improvement.

[Fairman]

Setting stop and target as orders at entry fixed most of this for me. When the exit is already on the server, there's less to fiddle with. The part that took longer was resisting the urge to close early when price got close to target and pulled back a bit. What helped there was hiding the profit figure on the platform, or at least not watching it, and checking the trade only at set times, like every 15 minute candle close. Staring at the open profit as it changes is exactly what triggers the disposition effect. If you only look at the chart structure, it's easier to let the plan do its job.

[Fairman]

Moving stops only toward less risk is a simple rule that works. Never further away, not even once just for this trade. The just this once trade is usually the one that becomes your biggest loss of the month. If you want to enforce it, add a flag in the journal for every stop moved against the plan and add up the extra loss those trades caused. Seeing a number like minus 6R over a quarter from moved stops alone makes the rule feel much less optional. Some platforms and trade managers let you lock a stop so it can only move one way, which takes the decision off the table completely.