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Loss Aversion

Loss aversion is a psychological bias that makes the fear of losing more powerful than the excitement of gaining. This fear can cloud judgment and lead to poor trading choices, such as holding onto losing positions or making impulsive, risky moves.

For example, imagine Tom buys a cryptocurrency at $100. When the price drops to $80, instead of cutting his losses, he holds on, hoping it will rebound. Meanwhile, he's missing out on better opportunities. This emotional response is classic loss aversion in action.

To combat loss aversion, traders can implement strategies like setting stop-losses, diversifying their portfolios, and taking time to evaluate the market objectively. Awareness of this bias can lead to more rational, informed decision-making.