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Loss Aversion Meaning

A psychological principle from behavioral economics stating that the "pain" of losing $100 is twice as powerful as the "joy" of gaining $100. This bias causes investors to make irrational decisions, such as "holding onto losers" for too long in the hope they will break even.

Loss aversion is why many traders fail. They will sell their "winners" too early to lock in a small gain (seeking the "joy") but will refuse to sell their "losers," letting a small loss turn into a catastrophic one.

They are "risk-averse" when in profit but "risk-seeking" when in a loss. Overcoming loss aversion requires a disciplined "Trading Plan" and the use of "Stop-Loss" orders.

By pre-defining exactly how much you are willing to lose on a trade, you remove the emotional struggle and prevent your brain's natural bias from sabotaging your long-term financial health.

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