Quote from volente_00:
EGO
Quote from Anekdoten:
Well, obviously I'm not looking at the superficials of the problem but into much deeper levels.
I understand the reasoning behind it what I don't understand is why it is so hard to overcome this "deficiency".
How many times must you hit your head against a brick wall to understand the real consequences of such actions ?
Naturally, this is different for every trader but for the most part, in my experience, the number is alarmingly high.
My conclusion is that they need to be right when what they need to be doing is making money regardless of how many times they are right or wrong.
Anek
The most direct answer I can give is these traders are not using hard stops in the market. This implies the trader is not expecting or planning for that trade to fail or become a loss. The adding to a loss behavior appears to be reactive and emotional, certainly not part of a coherent trading plan.
So if the trader has a plan to add only to winning positions, and take the full loss quickly when proven wrong, and that trader consistently executes the plan in real-time, then the issue of adding to losers will not arise.
Thus my simple explanation is the trader has formed a bad habit and has no plan to correct the behavior in the future.
A few thoughts as to why this is happening...
One partial explanation which fits in some but certainly not all cases is inexperience. A lack of understanding of the effect a handful of significant account balance drawdowns has on trader performance and confidence. In this vein I will add the tendency to over-estimate of one's actual ability, understanding and skill level.
Wishful thinking is certainly apparent in many cases, the hope factor.
Also, the inability of the trader to admit a mistake quickly and early.
As you point out in your reply, the need to win (which is really a self-esteem issue) runs counter to taking a small loss. Taking a loss is admitting defeat, which is actually a form of giving into a more powerful adversary (crying uncle).... uncle i give, you win...
It occurs to me this also ties back into this debate of trend .vs. counter-trend. It is my observation counter-trend traders (faders) are very susceptible to this behavior. The fader believes so strongly the trend is reversing as to step in front of the established trend with a live trade. The market will almost always give the fader a few ticks of confirmation reinforcing the initial analysis / belief the trend is in fact reversing. Unfortunately ( for the faders ) the retracement is usually short lived and the price trend will then continue on with the next volume driven impulse move forming yet another clear reversal signal (with the fader holding a small loss from the previous signal). It is this rhythm of initial confirmation of the reversal signal, followed by an additional clear reversal signal which tends to draw the fader into this destructive habit of fighting the trend (reactively adding to a loss). Eventually the faders loose confidence in the series of false signals give up and throw in the towel, at which point the trend usually comes to an end...
