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The Illusion of Control in Trading and Holding on to Losers

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The illusion of control in trading is one of the most crippling issues for so many traders.

According to our statistical analysis of a database where 80% of traders lose money:
the average winning trade lasts 539 minutes
the average losing trade lasts 801 minutes

The question we need to ask ourselves is why do we hold losing trades for almost double the length of time?

There are lots of answers to this question, but in this short note I will give you one which I think the chart we created adds to our visual understanding. We know that it is hard emotionally to accept a loss the theory of loss aversion explains this in greater detail and will be a dealt with in a future letter.

In this chart you see how trades that are held for lengthy periods of time eventually turn profitable. The dot at the end of the line is when the trade was closed, and you see that in this randomised batch of trades we have all the trades essentially closing out profitably. The point we wish to make here is that this behaviour often leads to a mistaken illusion of control.

Does the market really reward bad behaviour?

I was meeting with the head of marketing and sales yesterday of a large brokerage and he was telling me how the market often rewards bad behaviour. This got me thinking, by holding a trade much longer than you would typically do and coming out profitable on the other end, reinforces what we can statistically say is bad trading behaviour.

If you look at the statistic I opened this letter with you will see that holding trades for longer than you would hold your winners is a step towards unsuccessful trading, and we can all own up to the fact that we have fallen for the illusion and convinced ourselves that we just need to give the trade more time.

How to manage the tension between fear and greed England meets Dr Levy