The following wisdom from Dr. Robert W. Siroka is insightful for readers. He speaks to the issues trend followers solve:

Why do investors have such a hard time selling investments? In the time-honored tradition of answering a question with a question, let me start my response by asking: “What does money represent to you?” Does it mean security? Achievement? Freedom? Money may mean all those things. Research and clinical findings indicate several conscious or partly conscious emotional connections to money, including love, self-esteem, power, control, status, attractiveness and sexuality, competition, envy, revenge, fear, guilt, shame, excitement and depression. What does this have to do with the difficulty in selling? Consider that our emotional relationship with money influences the sell decision. While Economics 101 teaches that man is a rational maximizer operating in a calculating, self-interested mode, we all know that’s not always the case. After all, clients (and financial professionals) often act irrationally by dumping a “good” stock after a market correction, holding on to losers (which might come back) and selling winners early.

Selling involves change, and change generates anxiety and fear. Anxiety is a vague, worrisome, pervasive sense of alarm. Fear has a specific object or situation connected to the emotion. In practice, fear and anxiety frequently overlap. But since fear involves a specific object or situation, it may suggest a course of action, whereas anxiety is general and pervasive and suggests no easy out. The change involved in the decision to sell provokes both fear and anxiety because it always involves some form of loss, whether it is a decrease in an investment’s nominal value or abandoning hope for further gains.

Oddly enough, even if an investor profits from a sale, the event triggers negative emotions. He or she may feel the loss of further gain and experience separation anxiety. If investors break even through a sale, they may feel frustration and impatience. And if they sell at a loss, they will feel the obvious emotions of regret, anger, disappointment, shame, guilt and a desire to get even.

The ability to handle the emotions, indecision and uncertainty described by Siroka is built into any good trend following plan. The naysayers will argue that Siroka’s statements sound great on paper, but don’t work for everyone. Trend followers, and all great achievers, would disagree with that kind of excuse. They would agree with Ayn Rand’s passion to make it happen:

That something happened to you is of no importance to anyone, not even to you. The important thing about you is what you choose to make happen — your values and choices. That which happened by accident — what family you were born into, in what country, and where you went to school — is totally unimportant.

Why Systematic Exits Solve the Problem Siroka Describes

Siroka has catalogued every emotional state that occurs at the moment of a selling decision: fear, anxiety, separation anxiety, frustration, regret, anger, disappointment, shame, guilt, and the desire to get even. He notes that selling triggers negative emotions in all three possible outcome scenarios, whether the sale produces a profit, a breakeven, or a loss. The sell decision is emotionally costly regardless of the outcome, which is why investors systematically avoid it or execute it incorrectly.

A predefined exit rule does not eliminate these emotions. It removes the decision from the moment when they are operative. The stop loss was defined when the trade was entered, before the emotional relationship with the position had developed. When the stop is hit, the rule fires and the position is closed. The investor still feels regret and loss. But the rule does not feel anything. It executes the exit that was defined in the emotionally neutral environment before the money was at risk.

The trailing exit that closes profitable positions has the same structure. The investor who holds a profitable position while watching it pull back from the peak will experience separation anxiety and the fear of losing gains. Without a defined exit, those emotions will cause premature closure at the first sign of reversal. With a defined trailing stop, the exit fires when price falls by the defined amount from the recent peak, regardless of what the investor is feeling at the moment. The investor does not decide to sell. The rule does.

Rand’s quote is the philosophical counterweight to the psychologizing. Siroka explains why exits are psychologically difficult. Rand explains why that difficulty is not an excuse for failing to execute them. The circumstances of the difficulty — the emotional connections to money, the anxiety about change, the separation feelings — are accidental. What matters is what the trader chooses to do given those circumstances. The trader who builds a systematic approach to exits is choosing to make the correct decision regardless of the emotional cost. That choice is the difference between the traders Siroka describes and the trend followers who have solved the problem he identifies.

Frequently Asked Questions

Why do investors hold losers and sell winners too early?

Because the emotional cost of confirming a loss by selling is higher than the emotional cost of holding and hoping for recovery. Selling a loser makes the loss permanent and triggers regret, shame, and guilt. Holding preserves the possibility of recovery, which reduces the immediate emotional pain even though it increases the expected financial loss. Selling a winner early triggers separation anxiety and fear of missing further gains. Both patterns reflect the disposition effect: emotional responses that systematically produce the opposite of what a profitable approach requires.

What does Siroka mean when he says selling involves change and change generates anxiety?

He means that any selling decision requires moving from a known present state (holding the investment) to an unknown future state (not holding it), and that transition provokes anxiety because its consequences are uncertain. The investor who holds a losing position is in a known, if painful, state. The investor who sells enters an uncertain state where the loss is confirmed but the future is open. The anxiety about that uncertainty, combined with the concrete emotions of regret and loss, makes the exit decision psychologically costly even when it is financially correct.

How does trend following handle the emotional difficulty of selling?

By removing the sell decision from the emotionally charged moment and encoding it in rules built when the mind is clear. A stop loss defined at entry fires automatically when price reaches the defined level. A trailing stop fires automatically when price reverses by the defined amount from the recent high. Neither requires the trader to decide to sell in the presence of all the emotions Siroka describes. The decision was made in advance. The rule executes it. The emotional cost remains, but the correct action happens regardless.

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