Holding onto a losing position too long is a costly mistake, driven by hope and reluctance to accept a small loss. Traders often cling to their initial analysis or fear regret, expecting the market to reverse. This hesitation usually leads to larger drawdowns, stress, and missed opportunities to redeploy capital into better setups. Discover why this common error can hurt long-term trading performance.
- Sticking to a losing trade is natural due to the fear of realizing a loss in an account.
- Hurtful, biased analysis and decision-making can compromise the way a trader approaches markets, leading to lost positions.
- There is a tendency for players to take profits on winners and drag losers, which reduces the long-term reward-to-risk ratio.
Trading inherently involves mistakes; even advanced algorithms make them, and so it’s important for traders to be aware of the different and common types of trading errors.
What truly distinguishes the top traders is their approach to recognizing and reacting to such errors, and transforming them into positive contributors to their trading.
In this series, we explore the most common mistakes traders make, and examine how emotions like fear and greed, along with other behavioral errors, often hinder traders from advancing.
An example we will explore is a very common misstep: Keeping a losing position open.
Why is it so natural to keep losing trades?
Loss aversion
Loss aversion is a deeply ingrained behavioral mistake that has been studied throughout the years, and one of traders’ worst enemies.
Drawing upon insights from behavioral economics, specifically Kahneman & Tversky's ‘Prospect Theory’, we understand a fundamental human tendency: the pain of a loss is felt roughly twice as intensely as the pleasure of an equivalent gain.
This psychological principle explains the common instinct when a trade moves into negative territory. To avoid realizing this acute pain, traders often resort to holding onto the losing position, hoping that it will eventually recover.
Confirmation bias and ego
Sticking to a losing trade often stems from a trader's attachment to their analysis, seeing it as a reflection of their intelligence and sound judgment.
Admitting an error by cutting a loss is difficult; it wounds the ego.
As a result, instead of acknowledging contrary evidence of why the current trading setup is not prone to generate profits, traders look for information that confirms their initial view: small reversals towards their position, thinking that past trends should reproduce, assuming that markets are overextended in a direction, and should mean-revert, etc.
The gambler’s fallacy
A string of losses often creates the illusion that a win is "due." This false sense of control — the belief that randomness must "even out" — tempts traders to average down or double up, which only deepens their overall loss.
Such illusions can push a trader to assume that a losing position should naturally turn into a loser.
Unfortunately, when a position gets away from your entry, the odds of success statistically decrease, not the contrary.
How impactful are drawdowns
The problem is that your mind not only starts to play tricks on you, but losing trades can also be detrimental to your account and your confidence.
| % Loss of Capital | % of Gain Required to Recoup Loss |
|---|---|
| 10% | 11.11% |
| 20% | 25% |
| 30% | 42.85% |
| 40% | 66.66% |
| 50% | 100% |
| 60% | 150% |
| 70% | 400% |
| 80% | 900% |
| 100% | Zero balance account |
Keeping a losing trade for too long can dig a hole much bigger than the one initially planned.
It can also damage the account balance to the level that would be hard to recover from.
Nevertheless, losing trades will be part of your trading journey.
One way to approach them is to make sure that your risk parameters (how much do you accept to lose per trade, which can be in percentage of your account or dollar loss) limit how much your drawdowns can hurt your account.
This might also help you to be more diligent in your risk-taking, selective in your trading, and prevent another typical trading mistake: Overtrading.
Why is it still important to take losses and move on to your next trades?
Closing a losing position quickly — or "ripping the band-aid off" — is vital for maintaining a clear perspective and adhering to a trading plan.
By exiting a losing position, you free up both capital and mental energy, eliminating the significant opportunity cost of being stuck in a poor trade and missing better chances that align with the current market trend. Furthermore, allowing a losing position to recover (if it does!) only reinforces bad habits. Don’t forget that losing trades can also damage or wipe out your account.
Closing the trade allows you to continue viewing the market objectively and accurately log your mistakes in a journal, fostering disciplined and sustainable trading.
Learning from mistakes is what has allowed the best traders to be successful throughout their careers.
Conclusive lines
Sticking to a losing trade is one of the common habits for traders, driven by strong psychological forces — denial, hope, and ego.
By refusing to cut losses, traders inflate their risk exposure and lose sight of the market's objective direction, treating a bad position as one that could potentially turn into a profit.
This stubbornness ties up your trading capital, often resulting in larger financial losses and a missed opportunity to trade other markets or products.
Furthermore, holding onto a losing trade prevents traders from freeing up capital to prepare for more profitable setups and drive consistent, long-term success. Recognizing when you are holding a losing position, why traders engage in such behavior, and fixing it are essential to learn from your mistakes and progressing in your decision-making to trade with more impact.
In our upcoming edition of the “Most common mistakes traders make”, we will explore a common challenge, known as “trying to bounce back”.
This article is for general information purposes only, not to be considered a recommendation or financial advice. Past performance is not indicative of future results. It is not investment advice or a solution to buy or sell instruments.
Opinions are the authors; not necessarily those of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors.
Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and is not suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks. Losses can exceed deposits.
