Cut loss but let the profit runs

Anyone who doesn't just buy and hold probably heard this statement many times. Many people may also think this statement probably is easy to say than to do. We are human, it is normal.

To make this statement works the best you need to act more like a computer program than a human. I'm not here to tell you how to do it, I actually want to talk about how a person may see this statement over a decision-making cycle.

If you are kind of a Warren Buffett fan, you probably know a company so well that you feel like you are part of the company. Yes, I mean you need to fall in love with the company, otherwise, you won't spend much time in analyzing the company. So, if the stock drops, you probably will buy more, but not cutting the loss. It's because if you buy at a certain price that means you believe this company worth that price, so if it drops more it just means the stock is more undervalued, so you will think the upside is even stronger. Of course you will let the profit runs, a Warren-Buffett-type investors don't think about selling anyway.

If you are a purely computer-driven trader, you probably have never spent time to analyze any company's balance sheets or income statements, because you don't think you need to. Your trades totally depend on the signals generated by the computer program. After many testing you may find the threshold of when to cut loss will work the best for you. It may work very well it may not, really depends.

Now here comes the in-between-person. This person thinks he knows something about certain companies but he doesn't think he wants to hold forever. Based on his rough valuation he thinks he knows how much a company should worth, so he entered into the position and promises himself to cut loss if it doesn't work out. If the stock does drop and reaches the cut loss point, he hesitates. He will question himself about his own valuation, tries to read more news to find out what is wrong. He is not sure that if he should add more position (because it's more undervalued) or cut the loss (that's what he believes the discipline should be). He maybe lucky enough that when he is hesitating the stock goes back up. He maybe unlucky and sees his stock drops more and now he is even more hesitated.

I think it is quite important that you know who you are......