#Support & Resistance

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Topic: Prospect Theory and how it relates to trading? 7/01/2024

• What is Prospect Theory in trading. Prospect theory is a behavioral economics concept that explains how people make decisions under uncertainty. It suggests that individuals evaluate potential outcomes relative to a reference point and are more sensitive to losses than gains. In trading, this can influence traders to hold onto losing trades in the hope of avoiding a perceived loss, while being quicker to close winning trades to secure gains and avoid potential losses. The theory highlights the way individuals weigh risks and rewards, impacting their decision-making in financial markets. In the early 1970s, prospect theory had not yet been formally introduced. It was developed later by psychologists Daniel Kahneman and Amos Tversky in the late 1970s. However, behavioral aspects of decision-making were recognized even then, and some early studies hinted at the human tendency to evaluate gains and losses differently. Traders from that era may not have explicitly referred to prospect theory, but behavioral biases likely influenced their emotional decisions, prospect theory was still relevant in explaining how traders make decisions. Back then, it was widely recognized that individuals tend to be more risk-averse when facing potential losses and more risk-seeking when facing potential gains. In other words why you close trades early when your winning to secure profit and why you close little losses to avoid big losses is a THING. And for long now traders have known about this and fought it to be successful in trading. Fastest way to beat this is to be aware of it to actually avoid doing it. The rate of which traders don't know about this today only shows how much of a direction | Content and nonsense been thought in the name of trading guru's and mentors. Subscribe us for More insightful educational post. #JayForexHouse

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