This article is general information, not a recommendation to buy or sell anything. Academy articles are prepared by the ETTFOS team and other writers. They make no claim of expertise or accuracy, and they are not kept up to date after they are published.
Table of Contents
A trading plan is only as good as the way it is followed, and the decisions that matter most are made under pressure: when a position is losing, when a price is racing away, or when a run of wins starts to feel like skill.
Researchers have studied these moments for decades, on the trading records of real accounts.
Overconfidence and overtrading
In a study of 66,465 households with accounts at a large discount broker from 1991 to 1996, Brad Barber and Terrance Odean found that those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. Their explanation: “Overconfidence can explain high trading levels and the resulting poor performance of individual investors.”
Research for the UK’s FCA, published in 2021, found something similar in self-directed investors: they “often have high confidence and claimed knowledge”, yet over 4 in 10 did not see “losing some money” as one of the risks of investing.
Overconfidence is easy to see in others. In ourselves, it feels like conviction.
Holding losers, selling winners
Terrance Odean studied 10,000 accounts at a large discount brokerage for the disposition effect: “the tendency of investors to hold losing investments too long and sell winning investments too soon.” The investors, he found, showed “a strong preference for realizing winners rather than losers.”
Selling a winner feels like being right. Selling a loser feels like admitting a mistake. A rule that sets both exits in advance takes the feeling out of the decision.
Fear of missing out
A price racing upward can feel like a train leaving the station. The same FCA research found that for many investors, feelings such as “enjoying the thrill of investing” were key reasons to invest, and that for those in high-risk products, “the challenge, competition and novelty” mattered more than conventional reasons such as saving for retirement.
The result is buying after a move rather than before it, on someone else’s timing. A plan that says what must be true before a position is opened is the simplest defense.
After a loss
A loss can push a trader to break the plan the other way: larger positions, faster trades and a need to get even. It is often called revenge trading, and it can turn one loss into several.
Stress is part of the job. The SEC calls day trading “an extremely stressful and expensive full-time job.” A daily loss limit, set in advance, is one way to stop a bad day from becoming a bad month.
Habits that support discipline
- Decide before the market opens: entries, exits and size are set while calm.
- Keep a journal: what was planned, what was done, and why they differed.
- Size small enough to think: a position that is too large makes every tick feel urgent.
- Stop after a set loss: a daily or weekly limit ends the session before emotion takes over.
- Judge the process, not the result: a trade that followed the plan and lost is not a mistake; a trade that broke the plan and won is.
The takeaway
Nobody removes emotion from trading. The aim is to keep it from making the decisions. Rules made in advance, a size that keeps each loss small, and an honest record of every trade do most of that work.
This is where a written system earns its place: it gives discipline something definite to follow.
Your results will depend on your own decisions, your capital and market conditions, and you can lose money.
