Is it difficult to give up trading losses? Whether your trading decisions are affected by endowment effects

Have you ever found yourself clinging to loss-making positions during market fluctuations and feel that the market can turn around? But the profitable position is eager to close the position, worried that the profit you get will fly away? Are risks ignored due to excessive confidence in the face of market changes, or are unconsciously affected by previous investments when making decisions, even if these investments can no longer be recovered? These situations are not individual phenomena, but the result of a common concept in trading psychology – the endowment effect. In this article, EagleTrader will explore in-depth the internal mechanisms of the endowment effect, analyze how it affects trading decisions, and provide practical strategies to help candidates overcome this psychological barrier.

Endpower Effect

EndowmentEffect refers to an individual’s evaluation of the value of an item (that is, a certain foreign exchange asset in foreign exchange transactions), resulting in higher compensation requirements during sale or exchange.

Impact performance: In foreign exchange trading, traders may become emotionally dependent on certain currency pairs. Even if the market conditions change, they may continue to hold because they are unwilling to bear losses, and even ask for an excessive price when selling.

Psychological mechanism of endowment effect

Loss evasion

This is the core mechanism of the endowment effect. People are often more sensitive to losses thanSensitivity to equal returns, so in the decision-making process, the consideration of “avoiding harm” is much greater than the consideration of “seeking profit”. In foreign exchange trading, this psychological mechanism may cause traders to be more cautious when facing losses, and even continue to hold losses because they are unwilling to bear losses.

Emotional dependence

Owning an item (forex asset) will increase people’s emotional dependence on it and give it more personal meaning. In foreign exchange trading, traders may develop deeper feelings for a certain currency pair because of a certain investment philosophy or emotional connection represented by it, and thus are even more reluctant to give up on it.

Sense of belonging

When an individual owns an item, he or she will have a “feeling of belonging” and thinks that the item “belongs” to himself. This sense of belonging reinforces the subjective value of an item, resulting in a resistance when it is traded, sold or discarded. In foreign exchange trading, this psychological effect may make it more difficult for traders to give up their positions when facing losses.

Influence of endowment effect

Influence transaction decisions

The endowment effect may cause traders to be more cautious when facing losses, and even continue to hold losses due to unwilling to bear losses, thus missing the opportunity to stop loss. This may lead to further expansion of losses, affecting the overall returns of traders.

Influence market efficiency

Due to the existence of the endowment effect, it may be difficult for buyers and sellers in the foreign exchange market to reach an agreement on the price, which will affect the market’s trading volume and liquidity. This may cause market prices to deviate from the equilibrium level and reduce market efficiency.

Coping strategies for endowment effect

Rational Assessment:Traders need to rationally evaluate the actual value of their foreign exchange assets to avoid overestimating their value due to emotional dependence or sense of belonging. When facing losses, stop losses in time to avoid further expansion of losses.

Diverent investment:Diverent investment can reduce the impact of a single foreign exchange asset on the overall investment portfolio. Even if a certain currency pair loses, the losses can be compensated through the profits of other currency pairs.

Strengthen risk management:Traders need to establish a complete risk management mechanism, including setting reasonable stop loss points, controlling positions, etc. At the same time, it is necessary to pay close attention to market trends and policy changes in order to adjust trading strategies in a timely manner.

The endowment effect in foreign exchange trading is a common psychological phenomenon, and many traders are even unconsciously affected, thus distorting their judgments during the trading process. The existence of this psychological phenomenon explains why many traders will review and analyze after the transaction is over. By carefully reviewing and organizing the transaction process, they gradually revealed the blind spots in their mindsets, and in this process they learned how to adopt more effective strategies in future operations to reduce risks and increase the success rate of transactions.