Take two scenarios: In scenario one, you are holding a long EURUSD position. You are considering selling the position and going long JPY instead. In the end, you didn’t, Yen rises and you miss out on 50 pips of profit. In scenario two, you are long JPY. You sell your position and buy EURUSD instead. Had you held on to your long JPY position, you would have profited an extra 50 pips.
Which scenario would you feel more regret? Regret is the feeling of making the wrong decision, and it’s a feeling that traders of all levels experience.
A survey was taken with a similar situation and 92 percent of respondents said scenario two would yield more regret. Objectively speaking, both scenarios result in the same outcome. The difference is in scenario one, you already had a EURUSD position whereas, in scenario two, you actively bought EURUSD, thus leaving a position that would have been more profitable. Scenario one was a passive approach, representing the majority of people’s decision making and scenario two is the exception. It seems that whoever doesn’t follow the crowd experiences more regret.
The fear of regret often makes us act irrationally. To avoid this terrible feeling, we tend to take a conservative approach to decision-making. Even the best fund managers will sell riskier positions or deleverage right before the end of the month (when performance fees are owed).
The fear of regret is why we hold on to losing trades or don’t throw away things we no longer need. “Maybe I’ll want to use those old headphones again one day.” Marketing companies will use people’s fear of regret and combine it with the “last chance” or “limited time” offer. A museum advertises the retirement of a painting from an artist you never heard of. If you’ve never been interested in the artist before, why would you be inclined to see that particular painting today?
Don’t’ be fooled by so-called “once in a lifetime” trading opportunities. The reality is opportunities will always be there. Longevity in trading is the key. If you make a trading decision, don’t second guess yourself. It will only lead to irrational trading behavior in the future.