At the heart of effective trading is the simplistic aphorism, "cut your losers quickly and let your winners run." If you can do that with some level of consistency then you will produce exceptional returns.
Most traders are good at the "let your winners run" part, but they are not so hot at "cut your losers quickly."
Selling tends to present a psychological hurdle that many people just don't deal with very well. There is a tendency to attach a much higher level of significance to the selling decision.
Admitting Our Mistakes
Part of what happens is simply inertia. Once you own a stock it is easier to just do nothing and hope that the trade works over time. Rather than deal with a poor-acting stock, we ignore it and find reasons why it will be OK. The longer we hold a position the more emotionally attached we become to it. It may not be a great stock but we are familiar with it and have spent quite a bit of time with it so we will be forgiving of its behavior.
Selling tends to present a psychological hurdle that many people just don't deal with very well.
Selling a poor acting stock forces us to admit our mistake. As long as you are still holding a position there is a chance that it will work and your original decision to buy may turn out to be pretty smart. As a result, we end up holding a bunch of mediocre stocks that aren't acting that well but a few will come to life and cause us to hope that others will eventually work.
The single best thing most new traders can learn to do is to break this tendency to be emotionally invested in stocks that aren't working. Learning to sell a stock and then rebuy it is the easiest way to start thinking of stocks as simply trading vehicles rather than an emotional investment.
Not Your Friends
Stocks are not your friends. They will not necessarily reward you if you are loyal and forgiving of their bad behavior. They are likely to mistreat you if you don't watch them when they start to misbehave.
One of the best things traders can do periodically is to simply sell everything. Go completely to cash and start fresh. You can rebuy some of the stocks you just sold if you like but you will often find that they don't look quite the same when you evaluate them with a more objective mindset. That stock you were holding on to so tightly doesn't seem to hold the same sense of urgency when you are on the sidelines.
Part of the Trading Process
When you contemplate selling a stock what are the emotions that you are dealing with? Do you feel like it's an admission of failure? Are you convinced you are going to sell at the exact low? Selling should just be part of the trading process and you can always change your mind after it is done.
Start thinking of stocks as trading vehicles rather than emotional investments.
One thing that has helped to make me a better trader is that I expect to have quite a few losing trades. I know some will not work. It isn't shameful or a failure. It is just part of the process. That doesn't mean I make poor decisions. It means that I'm embracing the way the market works.
When you think every trade is going to be a winner then you won't rush to cut the bad ones. You will keep looking for excuses to hold on even when it just is a run-of-the-mill loser.
Once you break the tendency to be emotionally attached to your trades, you will become a much better trader. There are great new trades every day so why use up our emotional capital hanging on to the poor ones?