When it comes to stock investing, buying is the easy part.
When to sell a stock, however, is by far the most difficult aspects of investing!
No one knows until after the fact if the price you sold at was a good decision or not. And it frequently seems that right after you sell a stock, it goes on a monster run and you missed out the bulk of the gains.
So, having a system that provides stock selling rules and strategies helps you to get profitable results consistently and avoid regrets.
The key to outperformance is to act like a professional trader. You must have a plan with specific rules on how you’ll deal with your stocks whether they go up or go down from your purchase price.
There are two aspects to selling to understand:
Let’s go through these two ways of selling.
It’s very important to know your risk before you enter any trade. A trade may lose money for any number of reasons:
While you can’t control day to day market events, you can control the amount of risk you take and the amount of money you are risking on any trade.
The key is to always use a stop loss that will take you out of the trade if it starts to lose money.
One of Warren Buffet most memorable quotes is this:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
While taking occasional losses is part of the investing game, an important rule to adopt is to never let a stock go down more than 8%.
Why?
An 8% loss only needs a gain of 8.7% to regain your lost capital. This isn’t a hard thing to get in today’s market.
But a 50% loss requires a 100% gain to get your money back. The odds of ever getting your money back are not good. And big losses will affect your confidence.
You must avoid at all costs hanging on to a stock that is acting poorly and is in the negative column. Just take the loss and sell. It reduces the pressure and you can reevaluate the trade afterwards.
Stop orders should be placed as stop market orders. This means that once the price is triggered you will get filled at the market.
Some traders like to place an actual stop market order on a GTC (good till canceled) basis in their trading platform. If the stock hits that price it will be sold immediately at the market if that price is hit.
Others like to just have a mental stop and exit the trade when that price is hit.
Whatever method you use, make sure you stick with the plan and don’t hesitate to sell if needed.
To learn more about placing orders, please check out Module 24 in the free bonus Ultimate Stock Investing System course you received with your subscription.
Just like you should wade into the market with your purchases, you should wade out with your sells.
I personally set stops at -3%, -5% and -7% below my purchase price immediately after I buy a stock. If I am wrong and my stock goes down, I always try to average just a 5% loss. I can sit through a number of 5% losses without damaging my portfolio.
The important point is that this is not 5% of my whole portfolio I’m risking on a trade, but 5% of each position, which are much smaller parts of my overall portfolio.
I also move my stops up once I have some profit in the trade.
Check that your stop loss prices are not right at major moving averages like the 50-day or 200-day. The big institutions tend to support their stocks here and you may find that you sold right at support!
Let’s say you have a big winner that you have lots of profit in. At some point you’ll need to sell and take some or all of the profits.
As mentioned before, it’s imperative to have some kind of system you use to sell. Leaving it to chance will have you selling emotionally, usually near the bottom and not near the top. A system will help you sell when you should, maximizing your gains.
After analyzing most of my trades going back to 2015 with an eye to determine what would have been the most profitable selling strategy, I came up with the following rules which I use today:
Why sell a big chunk of a stock when it’s up 20%-25%?
The reason is that many stocks will form a new base after they have risen up 20-25%, so this is an ideal time to lock in some profits.
If the Market Trend Advisory starts to give off sell signals, I will sell some shares even if the stock didn’t quite reach my target goals.
In the end, selling around 60-70% of shares if I’m up 20% or more virtually guarantees that the trade will be profitable, no matter what happens to the remaining position I’m holding in hopes for a big move.
Emotions and investing are not good bedfellows. Trading decisions done under the influence of emotions rarely turn out to be smart moves.
All stock investors have had the unfortunate experience of selling a stock for a small profit and watch it go on to become a huge winner.
Or holding a big winner too long and eventually selling after all the profit has evaporated.
These experiences generate the negative emotions of regret, anger, greed, and coulda, shoulda, woulda:
Selling part of your stock on the way up, at important points dictated by the stock’s chart and the overall market trend, helps to reduce emotions. Your cashing out some profits when the stock is up, reducing regret that you sold too late.
This is why I like to take substantial profits on at least 50% when I’m up 20-25% in a stock, and hold the rest a potential big gain. It helps reduce these emotions and helps to grow your account equity.
Selling strategies can be categorized into two types, offensive selling strategies and defensive selling strategies.
Offensive sell signals are those you take action on while the stock is still rising.
Here are some examples:
Defensive sell signals are those signals that come from technical breakdowns in the stock’s chart. These sell signals come after the stock has already been falling. Common examples are:
Every publicly traded company is required to release earnings reports every quarter.
Most quarters they also release their guidance for the next quarter and/or year. That combination, including any surprises – is what really moves the stock the next day.
In the last few years, stocks more and more frequently make huge moves up or down after earnings reports. The resulting stock move is many times not based on the actual earnings numbers or guidance but on how the market perceives the results.
So, holding a substantial position in a stock in front of earnings has become more like gambling. I’ve had huge 40+% gains the day after earnings. And 30% drops the day after earnings.
The reason for these huge moves after earnings is because of Regulation FD.
In October 2000, in a well-meaning attempt to level the playing field, regulators passed Regulation FD. This regulation stated that all earnings, news, or forecasts must be released to the general public simultaneously with any release to market professionals or shareholders.
In the past, analysts and large investors were able to get “inside information” from company executives and directors in meetings that were not available to the general public. As this information slowly leaked into the various market participants over time, any earnings surprises or news was built into the price over time, resulting in more moderate moves in the stock’s price.
Today, though, the earnings and other news comes out either after the market closes or before the market opens. This leads to a huge imbalance that creates big moves up or down.
To reduce the risk of getting hit with a bad earnings reaction, a good rule of thumb is to have at least a 10% profit cushion on your stock if you plan to hold it into earnings.
With a larger position, another option is to hedge with a put option if you didn’t want to lose your position.
The alternative is to sell down to a portion of your position that won’t affect your portfolio in a big way if the stock crashes. You can always buy it back.
I’ve covered many rules and strategies in selling stocks to either lock in profits or protect against loss of capital. Be sure to find a strategy that fits your investing style and make it a part of your trading routine each day.
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