Why is taking profits always so easy, while cutting losses always so hard?

Capital management is crucial in futures trading. It can be said that predicting the market correctly is only half the battle; without a scientific capital management strategy, success often slips away. Many traders adhere to the principle of "limited losses, unlimited gains," but in reality, the opposite happens—their mindset towards profits and losses in futures positions is completely different: taking profits is always easy, while cutting losses is always too hard!

1. Insights from a Psychological Experiment

Why is taking profits always easy, while cutting losses always so hard? The answer lies in human psychology. To understand this, let’s look at a commonly cited psychological experiment. Imagine answering the following questions:

Question 1:
600 people are infected with a deadly disease, and there are two treatment options:
(A) Saves 200 lives for sure.
(B) A 1/3 chance of saving everyone, but a 2/3 chance of saving no one.
Which option would you choose?

Choosing A guarantees saving 200 lives, while choosing B is a gamble on how many can be saved. The choice is easy: 72% of respondents chose A because they didn’t dare gamble on the outcome.

Question 2:
600 people are infected with a deadly disease, and there are two treatment options:
(A) 400 people will definitely die.
(B) A 1/3 chance of saving everyone, but a 2/3 chance of saving no one.
Would you choose to let 400 people die? No—at least there’s a chance to save everyone. Only 22% of people chose A for this question.

This interesting experiment was first designed by Kahneman and Tversky in 1981. In reality, the two questions are identical—only the framing is different. The first emphasizes gains, while the second emphasizes losses. Through this and similar experiments, the two scientists concluded: People treat gains and losses differently—they are more willing to gamble on losses than on gains.

Now, let’s see how this applies to futures trading. Profits and losses are common in investing. Suppose your futures position is losing—what would you do? Like most people, you’d gamble that it will eventually "bounce back" (i.e., turn a floating loss into a floating profit or reduce the loss). Now, suppose your position is profitable—this time, you wouldn’t gamble. Instead, you’d simply take profits and secure the gains.

This phenomenon—"taking profits is always easy, cutting losses is always too hard"—violates the principle of "limited losses, unlimited gains." Over time, it causes many traders’ accounts to shrink. Even worse, one or two major losses that can’t be recovered may nearly wipe out their capital.