The sunk cost fallacy in trading is letting money, time or effort you have already spent decide what you do next. It is the voice that says “I’ve lost too much on this to close it now”, and it keeps traders in positions their own rules have already told them to leave.
Quick answer: what is the sunk cost fallacy in trading?
It is holding, or adding to, a losing trade because of what it has already cost you rather than what it is likely to do next. The loss so far cannot be recovered by waiting. The only useful question is whether you would open this exact position, at today’s price and with today’s stop, if you were flat.
What the sunk cost fallacy in trading looks like
A sunk cost is anything spent that you cannot get back. A 2018 study in Science opens with the textbook rule that sunk costs are irrecoverable investments that should not influence decisions, then shows that mice, rats and humans all let them do so anyway, more strongly the more they had already invested.
On a chart, the bias tends to appear in a handful of familiar forms:
- Moving the stop further away once price gets close to it.
- Waiting for break-even, so the exit is chosen by your entry price rather than by the market.
- Averaging down: adding to a loser to “improve” the entry when no plan called for it.
- Defending the analysis because you spent a whole weekend on it.
Why holding losing trades feels right
Closing a loser turns a paper loss into a real one, and that moment hurts. Our guide to why losses hurt more than equal gains explains the pain; sunk cost is what that pain does to the next decision. The more you have already lost, the more closing feels like admitting it was all wasted.
The entry price makes it worse. The Nobel committee’s summary of Richard Thaler’s work on mental accounting notes that a reference point could be the price for which we bought an item. In trading, that reference point is your fill, and it quietly becomes the target the trade “owes” you. That fixation on a single number is covered in our piece on anchoring bias when trading.
The market does not know your entry
Two traders can hold the same position from very different prices. The next tick is identical for both. Your entry matters for your profit and loss, but it tells you nothing about where price goes from here.
Worked example: the trade that grew from 1R to 11R
Example (hypothetical): a trader on a £5,000 account risks 1 percent, or £50, per trade, so 1R is £50. They buy an index spread bet at 8,000 for £5 a point, with a stop at 7,990. Ten points at £5 is the planned £50 risk.
- Price touches 7,995. Instead of letting the stop work, they cancel it, telling themselves the level “should hold”.
- Price reaches 7,950. The open loss is 50 points × £5 = £250, or 5R. They add another £5 a point at 7,950, so the average entry becomes 7,975.
- Price falls to 7,920. The first stake is down 80 points (£400) and the second down 30 points (£150). The total loss is £550, or 11R.
Getting back to break-even now needs price to climb 55 points to 7,975. A planned £50 loss has become £550, 11 percent of the account, from one idea. Spread bets and CFDs are leveraged, so without a stop a gap or fast move can push the loss further still, beyond what the trader ever meant to risk.
The fresh-eyes test
At 7,920, ask: “If I had no position, would I buy here, at £10 a point, with no stop?” Almost nobody would. If the answer is no, the existing position fails the same test, because the money already lost is gone either way.
Planned scaling-in vs averaging down
Adding to a position is not automatically the sunk cost fallacy. The difference is whether the decision and the total risk were fixed before the first entry.
| Question | Planned scaling-in | Averaging down |
|---|---|---|
| When was it decided? | Before entry, in the plan | After the trade went wrong |
| Total risk | Fixed in advance | Grows with each add |
| Stop | Stays where the idea is wrong | Moved or removed |
| Motive | Better location for the idea | Get back to break-even |
Adding to winners under fixed rules is a separate technique again, covered in our guide to pyramiding into a winning position.
How to stop the sunk cost fallacy in trading
You will still feel the pull of a losing trade. The aim is to make the exit a rule you set earlier, not a decision you make under pressure.
- Place the stop where the idea is wrong. Our guide to where to place a stop loss with price action covers this, and the stop is never moved further away.
- Fix risk before entry. Decide how much to risk per trade and treat it as the most the idea can cost.
- Write any adds into the plan. If scaling-in is not in your written trading plan, you do not add.
- Run the fresh-eyes test whenever you catch yourself thinking about your entry price.
- Log the urge. Note in your trading journal every time you wanted to move a stop, and what price did next.
The old desk rule still holds: our trading top tip to cut losses early is the plainest cure for this bias.
Common mistakes
- Treating break-even as a target. Your entry price is not a level the market respects.
- Calling an unplanned add “a better price”. If the plan did not allow it, it is averaging down.
- Protecting your analysis. Hours of preparation do not make an idea more likely to work.
- Trying to win it back elsewhere. Carrying one loss into the next trade leads to revenge trading.
- Confusing patience with hope. Patience waits inside the stop; hope moves it.
Frequently asked questions
Is averaging down always the sunk cost fallacy?
No. Scaling in at levels written into the plan, with total risk fixed in advance and a stop that stays put, is a method. Adding to a loser after it goes wrong, to reach break-even sooner, is the fallacy.
What is the difference between sunk cost and loss aversion?
Loss aversion is feeling losses more strongly than equal gains. The sunk cost fallacy is letting what is already spent drive the next decision. Loss aversion often supplies the feeling that sunk cost thinking acts on.
Is it ever right to hold a losing trade?
Yes, while price is still between your entry and a stop placed where the idea would be wrong. Every trade spends time in the red. The fallacy begins when the stop moves or the reason for holding becomes the loss itself.
Does sunk cost apply to time as well as money?
It does. Hours spent on an analysis, or months spent building a method, can make it hard to accept evidence that it is not working. Judge both on what they are likely to do next.
Next steps
Before your next trade, write the stop and the maximum loss in your journal and commit to the fresh-eyes test. Then read our guide to the five psychological hurdles traders face, and its sibling on overconfidence bias in trading.
A rules-based risk model and the psychological hurdles are both part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
