Sunk cost fallacy in trading

What the sunk cost fallacy is

A sunk cost is money, time or effort already spent that you cannot get back. The sunk cost fallacy is letting that past spending drive a new decision, even though only future outcomes can still change.

In trading, the sunk cost is the loss already sitting on an open position. The realistic question is: "Given the chart, my plan and my risk today, does this position still make sense?" The question many traders ask instead is: "How do I get back what I lost?"

How sunk cost trading looks in practice

Common forms of sunk cost trading:

• Holding losing trades past the stop. The stop-loss (a preset exit price) is moved further away because closing would make the loss "real".
• Averaging down without a plan. The trader adds to a losing position to lower the average entry price. Position size and exposure grow while the original idea is failing.
• Defending research time. Hours spent analysing a setup make it feel too costly to admit the analysis was wrong.
• Waiting for breakeven. The entry price becomes the exit target, though the market does not know or care where you entered.

With leveraged forex and CFD trading, these habits are dangerous. Leverage multiplies losses as well as gains. A held loser can reach a margin call or stop-out (forced closing by the broker when equity falls too low) and lose much more than the original stop would have, very quickly.

What the research says

Hal Arkes and Catherine Blumer studied sunk costs in controlled experiments. People kept investing in projects mainly because they had already paid for them, even when the future case was weak.

In markets, Hersh Shefrin and Meir Statman described the disposition effect: investors tend to sell winners too early and hold losers too long. Terrance Odean's analysis of brokerage account records found this pattern in real trading. The losers investors held tended to do worse afterwards than the winners they sold.

Prospect theory, from Daniel Kahneman and Amos Tversky, gives a likely reason. Losses feel heavier than gains of the same size, and people often take risks to avoid locking in a loss. See loss aversion for more on this.

Knowing about a bias does not remove it, and working on your psychology does not lead to profit. It can help you follow your own rules more consistently.

Exercises to decide based on now

The fresh-eyes test

For any open loser, ask: "If I had no position, would I open this trade now, at this price, with this stop and this size?" If the answer is no, the only reason to hold is the past loss.

Write the exit before the entry

Before opening a trade, record the invalidation level, meaning the price at which your idea is wrong. Add a rule that the stop can only move toward protecting the trade, never away from it.

Separate adding from rescuing

If your strategy allows scaling in, define it in advance: the conditions, the maximum total size and the combined risk. Any addition outside those rules counts as rescuing, not trading. Use the trading calculators to check total exposure before adding.

Tag it in your journal

Mark each trade where you moved a stop, added to a loser or waited for breakeven. Review the tagged trades separately from the rest. This shows the cost of the habit in your own records.

Close and reassess

If you cannot think clearly about a position, close it or reduce it, step away, and analyse the chart again as if it were new. Re-entering later at a worse price is a cost. Freezing in a losing trade is often a bigger one.

Related biases

The sunk cost fallacy often appears alongside anchoring, where the entry price becomes the reference point, and confirmation bias, where you look only for reasons to hold. After a forced exit it can lead to revenge trading. Broader habits are covered in risk management, trading discipline and process vs outcome.

Frequent questions

Is holding a losing trade always the sunk cost fallacy?

No. Holding is reasonable if the trade still meets your plan and your stop has not been hit. The fallacy is holding because of the loss itself.

Is averaging down always wrong?

Not always, but it is risky with leverage. It is defensible only when the plan was written beforehand with a fixed maximum size and total risk.

How do I know if I am affected?

Check your journal for moved stops, breakeven targets and unplanned additions. If these show up often on losing trades, the bias is likely at work.

Will fixing this make me profitable?

No. It can reduce avoidable damage and improve consistency. Leveraged trading can still lose money fast.