Why stop profit is always easy and stop loss is always too difficult

Fund management is very important in futures trading. It can be said that looking at the right market is only half of the success of the transaction. If there is no scientific fund management strategy, it will often be missed. Many traders believe in the capital management principle of "limited loss, unlimited profit". However, on the contrary, they have different attitudes towards the profit and loss of futures positions: stop profit is always simple, stop loss is always too difficult!
1、 Inspiration from psychological experiment
Why stop profit is always simple, stop loss is always too difficult? The answer comes from people's psychology. To understand this, let's look at a commonly used psychological experiment. Suppose you answer the following question:
600 people are infected with a fatal disease. There are two drugs to choose from:
(A) It could save 200 lives.
(B) There is a one-third probability that everyone can be cured, and a two-thirds probability that none can be saved.
What kind of medicine do you choose?
Choose a you are sure you can save 200 people, choose b you want to bet how many people can save. So the choice is easy: 72% of respondents choose a. Because you don't dare bet how many people you can save.
Here's another question:
600 people are infected with a fatal disease. There are two drugs to choose from:
(A) It must have killed 400 people.
(B) There is a one-third probability that everyone can be cured, and a two-thirds probability that none can be saved.
Would you choose to kill 400 people? No, at least it's possible to save everyone. For this question, only 22% chose a.
This interesting experiment was first designed by Kahneman and Tevez in 1981. In fact, the two questions are exactly the same, but the way of expression is different. The first one focuses on gains and the second on losses. Using this and other similar questions, the two scientists came to the following conclusion: people have different attitudes towards gains and losses, and people are more willing to bet on losses than gains.
Let's see how the above conclusions are applied to the futures market. Profit and loss is a common thing in investment. Suppose that your futures position has lost money, what do you do? You'll bet, like most people, that one day it will be "carried back.". Now let's assume that your futures position has made a profit. This time you won't gamble any more. Your approach is very simple: stop the profit immediately and make sure you are safe. This phenomenon of "stop profit is always simple, stop loss is always too difficult" violates the principle of "limited loss, unlimited profit". After long-term trading operation, many investors' capital accounts are shrinking day by day. What's more, due to one or two big losses, the capital is almost in deficit.
2、 The explanation of "stop loss is too difficult" by expectation theory
For the same size of gains and losses, we pay more attention to gains. This fact is called expectation theory. This theory was first put forward by Kahneman and Tversky in 1979. It can explain why traders prefer to stop earning rather than losing.
Furthermore, psychologists believe that regret theory can partly explain this phenomenon. Statman is an authoritative scholar of regret theory. He pointed out the obvious facts (refer to his 1994 article "tracking error, regret and asset allocation strategy"). According to Statman, we are more willing to lose than win because we dare not face the reality of failure. If we apply the above theory to the futures market, we can imagine that if we keep the futures position that has suffered losses (bet that it can carry it back), we don't have to admit that we have made mistakes. After all, the contract has not been closed, the loss is just a Book loss, can you say I lost? In this case, the vast majority of people prefer to believe that there will be something to reverse the direction of the market, so when the holding position has a loss, they tend to stop trading and hold still.
Shefrin and Statman gave an explanation of why people were reluctant to stop loss in 1985, when they used the stock market to explain. Now we might as well borrow this explanation to the futures market. Generally speaking, people speculate in futures for cognitive and emotional reasons. The reason they speculate in futures is that they think they have information, but in fact they only have noise. The reason why they speculate in futures is that they can be proud of futures. When the decision is correct, speculation in futures brings pride, while when the decision is wrong, speculation in futures brings regret. Investors want to avoid the pain brought by regret, so they have to hold the loss of futures positions in their hands, so as to avoid the real loss, or blame the commentators.
Regret theory, also known as "risk aversion", as a typical example of self-protection attitude, explains why futures investors "stop loss is too difficult".
There is another phenomenon that can explain the theory of expectation. This is the so-called "spiritual isolation". Its basic reasoning is as follows: we like to classify and treat unknowns differently, rather than taking them as a whole and considering them as a whole. A typical symptom of this phenomenon is that it is difficult to invest in other more promising portfolios because of the occupation of funds by holding a loss making futures position. We're always trying to optimize every investment (which is stupid), even if we know that it means losing the overall investment opportunity. I have witnessed that a customer was held up for more than three months because of the loss of several pieces of wheat, and finally he didn't carry them back, so he could only admit the loss. During this period, due to the occupation of funds and irritability, he didn't make a deal, resulting in the missed of the right trading opportunity.
Cognitive dissonance can finally explain the reason why "stop loss is too difficult". To close a losing futures position is to admit the inconsistency between one's view of the market and the cruel reality of the market.
3、 Why is it always easy to stop profit
When the market moves in the same direction as the trader's judgment, the futures position begins to generate floating profit, which is quite different: the winner has nothing to hide. But winners face another pitfall: they are more willing to think that their success is the result of personal efforts than luck. Social psychologists call this phenomenon "conceit.". On average, at least, we are all conceited. The vast majority of people believe that each of their personal virtues is above average - including driving skills, sense of humor, risk control and life expectancy. For example, when asked about the driving safety ability of a group of American students, 82% thought they were in the top 30%. What does this mean for investors making money in the futures market? According to this theory, many investors attribute their recent earnings in the futures market to their higher investment level than ordinary people. And because they think they are highly skilled, they operate more frequently, and some even try to capture every fluctuation in the market. Therefore, the main reason for their high enthusiasm for profit stopping is their self-confidence.
4、 Conclusion
Many investors are confused that "stop profit is always simple, stop loss is always too difficult". In fact, this is a weakness of our human nature. If you want to beat the market, you must beat yourself first. Profit and loss is a common thing of investment. If we want to make profits in the future market, we must correctly treat the profit and loss of investment, which is the prerequisite for establishing a scientific fund management strategy. Before trading, make a detailed trading plan, and then strictly implement your trading plan. Don't stop the profit, don't stop the profit casually, and don't be "soft hearted" when it's time to stop the loss.