Loss aversion

Loss aversion – Traders exhibiting loss aversion feel losses much more intensely than equivalent gains, leading them to avoid losses at all costs. This can cause them to hold losing positions (to avoid realizing a loss) and to sell winners quickly (to lock in gains). In a bot, loss aversion might appear if risk controls are too conservative, causing the system to exit trades at the slightest drawdown. Loss aversion is formally defined as the tendency to place more weight on the pain of losses than on the pleasure of gains. For example, traders may require a much higher return to compensate for potential losses, sometimes rejecting profitable trades. In algorithmic terms, risk parameters like StopLoss and reward-to-risk settings help counter loss aversion by enforcing consistent exit rules regardless of emotions.

⬅ Robots Glossary