The feeling
“I’m up $60. What if it turns around? Just take it, a win is a win.”
…and on the next trade:
“I’m down $90. If I close now, it’s a real loss. It’ll come back. Give it time.”
Two different trades, one pattern. You protect the wins and protect yourself from the losses, and it costs you both ways.
The short answer
The disposition effect is the habit of closing winners too early and holding losers too long. It is one of the most studied patterns in investor behaviour. On gold it leaves you with small wins and big losses, which can lose money even when you win more than half your trades.
The fix is to decide both exits before entry, a stop and a target at real levels, place them as orders, and then measure your average win and average loss every week.
Where the idea comes from
- In 1985, Hersh Shefrin and Meir Statman named it in a paper called “The Disposition to Sell Winners Too Early and Ride Losers Too Long” (Journal of Finance). They linked it to Kahneman and Tversky’s work on how people dislike realising a loss.
- In 1998, Terrance Odean studied the trading records of 10,000 accounts at a large discount brokerage. He found those investors showed a strong preference for selling winners rather than losers, and that this was not justified by what the shares did afterwards (Journal of Finance).
Those studies were about shares, not gold CFDs. But the same feeling is easy to spot in any trading journal.
Why your brain does it
- A win on screen feels fragile. Closing it gives you a good feeling now and ends the worry.
- A loss isn’t “real” until you close it. Holding keeps the hope that it will come back, and avoids the feeling of being wrong.
- Losses feel heavier than gains. This is loss aversion, from prospect theory (Kahneman and Tversky, 1979).
A gold example: why 55% wins can still lose
Example numbers, not a real record. 1R = the amount risked on a trade.
Trader A: disposition effect. Wins 55% of trades. Closes winners early, average +0.6R. Holds or widens losers, average −1.4R.
- Expectancy per trade = 0.55 × 0.6 − 0.45 × 1.4 = 0.33 − 0.63 = −0.30R.
- Over 100 trades at $50 per R: −$1,500.
Trader B: lets the plan work. Wins only 45% of trades. Takes the full target, average +2R. Takes the stop, −1R.
- Expectancy = 0.45 × 2 − 0.55 × 1 = 0.90 − 0.55 = +0.35R.
- Over 100 trades at $50 per R: +$1,750.
Trader A wins more often and still loses. With wins of 0.6R and losses of 1.4R, she would need to win 70% of all trades just to break even (1.4 ÷ (0.6 + 1.4) = 0.70), before spreads and commissions.
Try your own numbers in the expectancy calculator. The trading maths lesson explains expectancy step by step.
Warning signs in your journal
- Your average win in R is smaller than your average loss in R.
- Your win rate is high but the account is flat or down.
- You often close trades a few dollars into profit, then watch price reach your old target.
- Your biggest losses are much bigger than 1R. That usually means moved stops.
Five fixes you can do today
- Both exits before entry. Write the stop (where you’re wrong) and the target (the next real level) before you click. The risk-to-reward note shows the break-even win rate for each ratio.
- Place them as orders. A real take-profit and a real stop in the platform. Then close the trade window and set an alert.
- If you want to take some profit early, make it a rule. For example: “close half at +1R, move the stop to breakeven, the rest goes to the target”. Same rule every time.
- Measure average win and average loss in R every week. These two numbers show the disposition effect better than any feeling. Use the trade journal.
- Make your size smaller. When each trade is a smaller part of your account, a profit on screen feels less fragile and a loss feels less like a disaster. Both exits get easier to leave alone.
Your rule card
My exit rules
- ☐ Stop and target written before entry, at real levels.
- ☐ Both are placed as orders in the platform.
- ☐ Early profit only by my written partial rule: ________
- ☐ Losses are never held past the stop. The stop never moves away.
- ☐ Every Sunday: my average win ____ R, average loss ____ R.
How to check yourself in 15 minutes
Take your last 20 closed trades from your journal or your platform’s history. For each one, write the result in R (result ÷ planned risk). Then work out three numbers:
- the share of trades that won;
- the average winning trade in R;
- the average losing trade in R.
If your average loss is bigger than your average win, and your win rate isn’t high enough to cover it, the disposition effect is probably costing you. Look at the biggest losses first: they usually show a moved or missing stop.
Common mistakes
- Looking only at win rate. A high win rate feels good, but the size of wins and losses decides the result.
- Fixing one half only. Letting winners run while still holding losers just makes both bigger.
- Calling a held loser a “long-term trade”. If the plan was a day trade, the plan was wrong or the stop was ignored.
- Moving the target closer during the trade. That is the disposition effect in its quietest form.
Sources
- Shefrin, H. and Statman, M. (1985), “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence”, Journal of Finance 40(3), 777–790, doi:10.1111/j.1540-6261.1985.tb05002.x
- Odean, T. (1998), “Are Investors Reluctant to Realize Their Losses?”, Journal of Finance 53(5), 1775–1798, doi:10.1111/0022-1082.00072
- Kahneman, D. and Tversky, A. (1979), “Prospect Theory: An Analysis of Decision under Risk”, Econometrica 47(2), 263–291, doi:10.2307/1914185
- The examples use example numbers; the expectancy maths was checked by script. Costs (spread, commission, swap) are left out to keep it simple; they make both results a little worse.
Educational content only, not financial advice. Trading gold with leverage carries a high risk of loss.
Frequently asked questions
What is the disposition effect?
It is the habit of selling winning positions too soon and holding losing positions too long. Hersh Shefrin and Meir Statman described it in 1985, and Terrance Odean found it in the trading records of 10,000 brokerage accounts in 1998. In trading it shows up as small wins and large losses.
Why do I close my winning trades too early?
Because a profit on screen feels like something you could lose, and taking it feels good right now. Locking it in removes the worry. The cost is that your average win becomes much smaller than your plan needs.
Can I be profitable with a high win rate?
Only if your average loss is not too big compared with your average win. With wins of 0.6R and losses of 1.4R, you need to win 70% of trades just to break even, before costs. Win rate alone tells you very little.
How do I stop cutting winners short?
Set the target before entry at a real chart level, place it as a take-profit order, and walk away. If you want to take some profit early, write a partial-close rule in advance. Track your average win and average loss in R every week.
Is taking partial profits the same thing?
Not if the rule is written before the trade and you follow it every time, for example closing half at +1R and leaving the rest to the target. It becomes the disposition effect when you close by feeling, trade by trade.
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