I copied this post someone made in this forum... I liked it so much I saved it. Quote from Htrader: I completely agree and could probably write pages about this, but instead I'm going to focus on a particular example. Psychologists have shown that when it comes to risk and money, a normal human is subject to two factors: 1. law of diminishing returns, and 2. law of endowment 1. law of diminishing returns - the utility you place on gains decreases as your gains increase. So you gain more utility from winning your first $1,000,000 then you do from winning the next $1,000,000. 2. law of endowment - Your marginal loss in utility actually decreases as your losses increase. So its hurts to lose that first $100,000. But the marginal pain from losing that next $100,000 is less than from the first. As it relates to trading, this means that when a normal person has a very good trading day they tend to back off and protect those gains, since their expected utility from even more gains is less than what they would lose in utility should they give some of the money back. On the other hand, when a normal person has a losing day, they try and try to make it all back, taking increasingly larger risks. Why? Because each additional loss means less and less to them on a marginal level. Now ideally, a top trader should do the exact opposite. Place more utililty on ever increasingly large gains, and be very sensitive to additional losses. So on a day when you are doing well, increase your size and risk tolerance, since you obviously are in sync with the market, and push your day for all its worth. On the other hand, on days when you are suffering losses, decrease size and risk, and rather than focusing on making all your money back, just try to keep ADDITONAL losses to a mininum. All of this is just one small example, but I find it very interesting.
Good post. I'm always amused when traders talk of 'making' their quota and stopping, as if they'd used up all the luck they're entitled to have that day, and don't want to give it back. I must say, that pulling back off a good run may make sense only if you know you have a habit of playing poorly off of a few scores. Getting sloppy, losing discipline, etc. So you either get that bad habit under control or leave the table as the only other resort.