Are Professional Traders Too Slow to Realize Their Losses?
Posted: 10 Aug 2004
Data on a U.S. proprietary stock-trading team provide evidence of the tendency of traders to hold on to their losers too long and sell their winners too soon - that is, the disposition effect. The group of traders studied earned more than $1.4 million in intraday trading profits, but they realized their winning trades at a much faster rate than their losing trades. This tendency lowered their profitability. When the traders limited their risk exposure by trading in small share sizes, in low-priced stocks, or during periods of low volatility, the discrepancy between losing and winning holding times rose. An analysis of intraday prices suggests that traders could increase trading profits by holding winners longer and selling losers sooner.
Keywords: Investment Theory: Behavioral Finance; Portfolio Management: Trading and Execution
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