# Why Traders Hold Losing Trades Too Long

Source: https://www.tradicted.com/lessons/trading-psychology/holding-losing-trades/

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Traders hold losing trades because selling makes the loss final. As long as the trade stays open, it could still come back. That hope can keep a trade open long after the reason you bought it is gone.

Researchers call it the disposition effect: selling winners too soon and holding losers too long.

The free lesson on this page puts you in one trade on a generated chart and stops five times to ask whether you sell or hold. Nothing is scored. The point is to notice how each choice feels.

## What is the disposition effect?

The disposition effect is the habit of selling winning positions more readily than losing ones. Hersh Shefrin and Meir Statman named it in 1985.

Terrance Odean measured it in the trading records of 10,000 accounts at a large discount brokerage, from 1987 through 1993. On every day an investor sold something, Odean counted which of the account's other gains and losses were sold and which were kept.

| Position on the day of a sale | Share that was sold |
|---|---|
| Up from the purchase price | 14.8% |
| Down from the purchase price | 9.8% |

A position that was up was about one and a half times as likely to be sold. The losers did not earn that patience. Over the following year, the winners investors sold beat the losers they kept by 3.4 percentage points.

That is Odean's "Are Investors Reluctant to Realize Their Losses?" in the Journal of Finance (October 1998). A [summary of the study](/research/odean-disposition-1998/) is in the Tradicted research library.

## What happens in the lesson?

You buy at a support zone. The lesson first asks how much you trade with. The amounts here use $10,000.

Within three days the trade is up 18%. At the resistance zone it is up $2,100, and the lesson asks whether you sell.

![A trade bought at a support zone has climbed to a resistance zone and is up $2,100](https://www.tradicted.com/lessons-img/psych_l1-psych_l1_ride.s2-1a4c11a6.webp)

*Up $2,100 at the resistance. The lesson stops here and asks: sell or hold?*

From there the trade turns. Up $600, then back to even. Then a candle closes well below the support, and you are down $700, then down $1,100.

![The same trade after the support broke, down $1,100 from the entry and far below the top marked at +$2,200](https://www.tradicted.com/lessons-img/psych_l1-psych_l1_ride.s6-7382746d.webp)

*Down $1,100 from the entry, and $3,300 below the top you saw.*

Two prices now sit in your head: where you bought, and the top at +$2,200. From the top you are down $3,300. Only $1,100 of that was your own money. The rest was profit you saw and never took.

Watch how the goal moves as the trade falls. First more profit, then keeping some of it, then getting back to what you paid.

## Why is a losing trade so hard to sell?

Selling turns a paper loss into a real one. Holding keeps the chance that price comes back, so holding feels like the cheaper choice even when the chart has stopped supporting it.

Seeing your purchase price makes it worse. Cary Frydman and Antonio Rangel ran a [trading experiment](https://pmc.ncbi.nlm.nih.gov/articles/PMC4357845/) with 58 people at Caltech. When the software hid each stock's purchase price, the disposition effect was 25% smaller than when it showed it (Journal of Economic Behavior & Organization, 2014).

In the lesson, the dashed entry line is that purchase price.

## What should you ask before holding a losing trade?

Ask yourself: "Would I buy here if I had no trade open?" It takes the price you paid out of the decision and leaves only the chart.

The lesson tests it on a second chart. You are down 29% after a candle closes below support, and you choose whether to sell or hold.

![A second chart with an entry line high above a support zone, and a candle closing below the support for a $2,900 loss](https://www.tradicted.com/lessons-img/psych_l1-psych_l1_twin.s2-6740d898.webp)

*Down $2,900 after a candle closed below support. Sell or hold?*

Then it shows the same chart and the same candle with no entry line, and asks whether you would buy there.

![The same chart and the same candle with no entry line and no profit or loss shown](https://www.tradicted.com/lessons-img/psych_l1-psych_l1_twin.s3-faa197f1.webp)

*The same candle with no trade open. Would you buy here?*

If your answer changes once the entry line is gone, you were holding because of the entry line.

| Your answer with no trade open | What it says about holding |
|---|---|
| Yes, I would buy here | Holding fits what the chart shows |
| No, I would not buy here | The reason to hold is the price you paid, or the top you saw |

## Was holding right if the trade came back?

One result cannot tell you. A good decision can lose and a bad one can win, and the difference only shows over many trades. The [risk management lessons](/lessons/risk-management/) show how many.

## Key points

- Traders hold losing trades because selling makes the loss final, and holding keeps the hope that it comes back.
- In Odean's 10,000 accounts, 14.8% of gains and 9.8% of losses were sold on days the investor sold. The winners sold did better afterward.
- Two prices drive the feeling: the price you paid and the highest price you saw.
- Before holding, ask whether you would buy at today's price with no trade open.

Press Start above and hold your first trade. [Lesson 2](/lessons/trading-psychology/revenge-trading/) covers what a bad morning does to the size of your next trade.