Stan Weinstein was a big proponent of using stop losses and making your trading as mechanical as possible. One of my favorite quotes of his from Secrets From Profiting In Bull And Bear Markets is this:
In my own experience mechanical decisions are much cleaner and easier to execute than manual emotional decisions. Stan says this about the problem of dealing with emotions as a trader:
“Using sell-stops results in a minimum of emotion and misgivings. Your sell will often occur without you even knowing about it, while you are busy with your workday or even on vacation. Best of all, there will be no gut-wrenching decision-making. Should you hold despite the bad news? Should you sell because your broker heard a negative story on the stock? Is XYZ now too high or getting ready to tumble? It’s all mechanical and disciplined. Most important of all, we let the market make the judgement for us. And since the market is the ultimate reality when dealing with the trend, its judgement is far more likely to be right than all of our balancing of pros and cons!”
In my experience he is exactly right here, even armed with the rules of Stage Analysis it is easy to pull your stops and not follow the system as it is supposed to be traded. You can also come up with other reasons to not sell, maybe you are trying to use other systems at the same time and convincing yourself that now is not the time to sell. I talked about that in a recent interview where I stated that by just focusing on Stage Analysis I’m freeing up myself from being improperly influenced by other ideas that in the end aren’t going to help my trading.
Being able to pull the trigger and take a small loss is the most important part of being a profitable trader, and I think Stan is 100% correct here in stating that the more mechanical that process is the less it will be unduly impacted by emotions. Not just Stan Weinstein but Jesse Livermore and Brad Koteshwar had plenty to say about how emotions impact trading.
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