How Can a Trading Plan Help Mitigate the Sunk Cost Fallacy?
A well-defined trading plan includes pre-set, objective exit criteria (stop-loss and take-profit points) that are decided before emotion can influence the trade. By adhering to the plan, the trader removes the subjective, emotional decision-making driven by the sunk cost fallacy, forcing them to accept a loss when the technical or fundamental conditions are breached.
Glossar
Objective Exit Criteria
Criterion ⎊ Within cryptocurrency derivatives and options trading, a clearly defined Objective Exit Criteria represents a pre-determined threshold or set of conditions that trigger the termination of a position or strategy.
Trading Plan
Structure ⎊ A Trading Plan is the formalized, documented blueprint outlining the systematic approach an entity will take to participate in financial markets, encompassing asset selection, strategy definition, risk parameters, and execution protocols.
Sunk Cost
Investment ⎊ The sunk cost fallacy, prevalent across cryptocurrency, options, and derivatives markets, represents the cognitive bias wherein decisions are unduly influenced by prior expenditures, irrespective of future prospects.