How to adjust the mentality of selling too early?

Today's reading notes

Investors sell assets that have surged (Winner) and buy assets at low levels (Loser) to diversify risks or follow the mean reversion logic of "buy low, sell high." The result is often "the strong get stronger, the weak get weaker," where the original holdings accelerate their rise after being sold, while the newly bought positions stagnate or even decline further. This double whammy is called "Whipsaw" and is a core trigger for destroying trading confidence.

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The "Loss Aversion" theory suggests that the pain of losing is twice as intense as the pleasure of gaining the same amount. However, in certain situations, the brain's pain response to "missed huge gains" can even surpass the pain of small actual losses.

. This is a psychological mechanism called "reverse loss aversion": investors perceive the "profits they should have earned but didn't" as wealth that belonged to them, so subsequent price increases are felt as a persistent sense of "being deprived."

Consequence: A surge in risk appetite (chasing highs, revenge trading)
 

"Selling winning stocks too early and holding losing stocks too long"

Humans are risk-averse. Faced with the choice between "100% chance to get $1,000" and "50% chance to get $2,500 (50% chance to get $0)," most people choose the former, even though the latter has a higher mathematical expectation ($1,250).

In trading, unrealized gains represent "certain profits." As unrealized gains increase, investors' fear of profit retracement grows exponentially. To eliminate the anxiety caused by this uncertainty (Amygdala activation), the brain issues the command to "take profits." Selling instantly releases anxiety and provides short-term dopamine rewards. However, this short-term psychological comfort comes at the cost of sacrificing long-term potential gains.

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Another driving force is regret aversion. Investors fear that if they don't sell now, profits will turn into losses, leading to even greater regret later. To avoid future regret, they choose to sell now. Ironically, this action taken to avoid regret often leads to another form of regret—"selling too early"
 

—a hypothetical reconstruction of past events: "If I hadn't sold then, I would have made more now."

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After selling too early, investors habitually engage in "upward counterfactual" thinking, imagining a better outcome than reality (Better-World Scenario). The evolutionary purpose of this mindset is to help humans learn from mistakes ("Next time, I'll hold longer"), but in the highly random financial markets, it often turns into endless self-punishment.

Research shows that upward counterfactual thinking significantly increases negative emotions, causing investors to overlook that their decisions were based on the information available at the time. They judge past decisions with the "God's perspective" of the present.

Regret from taking the initiative (selling) is often stronger than regret from inaction because the former involves the responsibility of actively cutting off profits. Investors think: "I personally killed the goose that lays golden eggs." This strong sense of personal responsibility intensifies the pain.

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The root of the pain from portfolio adjustments lies in investors' cognitive dissonance between "Mean Reversion" and "Momentum."   

• Belief in Mean Reversion: Investors sell high-priced assets and buy low-priced assets based on the naive logic of "what goes up must come down, and what goes down must come up." This is a long-term effective rule but often fails in the short to medium term.
• Reality of Momentum: Markets often follow momentum in the short to medium term (3-12 months), meaning "the strong get stronger, the weak get weaker."

When investors use long-term mean reversion logic to fight short-term momentum reality, the result is "the original holdings keep rising (momentum continues), while the adjusted positions stagnate (weakness persists)." This isn't the market targeting investors but rather a time horizon mismatch.

Selectively focusing on stocks that continue to rise after selling while ignoring those that actually decline creates a memory filter that makes investors feel "I always sell too early," leading to learned helplessness.

For emotionally troubled human traders, partial profit-taking is the psychologically optimal solution.
 

• First Batch (33%): Risk Off
  • Trigger Condition: When the price reaches initial technical resistance (e.g., previous highs) or unrealized gains equal 1x the initial risk (1R, Reward-to-Risk ratio 1:1).
  • Psychological Effect: Lock in some profits or at least cover transaction costs. Move the stop-loss for the remaining positions to the breakeven point. This ensures the trade won't lose principal in the worst case, greatly reducing anxiety.

• Second Batch (33%): Bank Profit
  • Trigger Condition: When the price reaches the core target (e.g., Fibonacci extension 1.618) or shows clear overbought signals (e.g., RSI > 70).
  • Psychological Effect: Convert most paper wealth into real money. By this point, investors are satisfied with their returns and feel more at ease.
• Third Batch (34%): The Runner
  • Trigger Condition: No fixed target price. This portion is purely for following the trend until a reversal signal appears (e.g., breaking below a key moving average or ATR trailing stop).
  • Psychological Effect: This portion is specifically for curing "selling too early" anxiety. If the market turns into a super bull run (e.g., NVIDIA or Tesla's main uptrend), this 1/3 position will capture the final stretch of profits. Even if it exits with a pullback, the investor can feel content: "I got the meat and tried the tail."   

 The "Free Option" Mentality After Breakeven

Once the first batch of profit-taking is done, the trade psychologically becomes a "free lottery ticket" or "house money." Behavioral finance research shows that when investors feel they're risking the market's money (house money) rather than their own capital, their risk tolerance increases significantly, allowing them to hold positions through volatile swings.

Moving averages are the most intuitive tool.

• Rule: Only exit when the closing price is below the 20-day moving average (short-term trend) or 50-day moving average (medium-term trend) for two consecutive days.
• Psychological Implication: This rule clearly tells investors, "As long as the moving average isn't broken, the trend isn't over." It delegates the exit decision to the moving average, not the investor's fear.

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