Buying is easier than selling. When we buy stocks or other investments, we feel hope and optimism. It’s a pleasant experience. We may even daydream about what we’ll do with our profits.
Selling is the opposite. If we’re selling for a loss, we are acknowledging that we were wrong and taking an action that will cause pain. That is very difficult to do from an emotional standpoint. But even if we’re selling for a win, it removes those positive emotions we had when we bought. We’ll always question whether we’re getting out too early and leaving more gains on the table.
We should not let emotions play a role in selling decision. You should have an automated exit plan from the moment of entering a trade. Here are 2 ways how to set up selling decisions ahead of time:
1. Use trailing stops
Add a trailing stop straight away once buying a stock. The decision to sell at a certain price has already been made and it was made when you are thinking rationally and logically and not when the stock is in a free fall or when unexpected news hit the wires.
2. Position size appropriately
Never buy so much of an investment that you can’t recover if it becomes a loser. If you put too much money into any single investment, that will cause you a lot of stress. When you’re stressed, you’re going to act emotionally.
You may sell too soon because you just can’t take it anymore, or if the investment goes south, you’ll hang on too long, praying it will come back because you can’t face selling for such a massive loss.
That is a recipe for disaster.
By keeping your position sizes small, you can withstand a problem in any individual investment. Investors should not put more than 5% of their portfolio in any single investment.
Sven Franssen