Posts filed under “Apprenticed Investor”
Most people have no idea when to sell their stocks because they don’t have a strategy.
Michael Sincere at Fidelity discusses this issue, and some of the strategies used by trading professionals to help in identifying trade exits:
1. Have a selling plan
It’s essential that you have a selling plan that is customized to fit your personality and trading style. Your trading plan must include a minimum of three numbers:
• Purchase price
• Expected selling price (dollar or percentage)
• Emergency exit price (dollar or percentage) if the stock goes against you
2. Use flexible price targets
Price targets have to be flexible because the market might not be compliant. Remember that the market doesn’t have any personal interest in your trade, nor does it care how much money you are hoping to make on a trade.
3. Use flexible time targets
Also be flexible in your holding periods. If a trade is not profitable by a certain period of time, exit the position and invest the money elsewhere.
4. Cut your losses and protect your gains
Don’t use arbitrary stop losses. Use more-sophisticated technical signals than an arbitrary percentage. Do not let a meaningful profit turn into a loss.
5. You can’t go wrong taking profits
Every trader has his or her own method for taking money off the table. (Note that this is a trader’s — and not an investor’s — strategy).
6. Using the "cockroach" theory
When applied to selling, the cockroach theory means that if you see anything wrong about a stock you own, either a negative news article or other information, you sell. The expectation is that there will be additional bad news coming.
7. If in doubt, get out
Whenever I hesitate, I get smaller. Either sell or reduce the size of his position when unsure about a stock. In general, the safest choice you can make is selling a stock you aren’t sure about.
8. Know your psychological sell signals
When you trade stocks, you not only battle the market but your own emotions. As many traders know, the two most common emotions are greed and fear. Greed prevents you from selling at the top. And fear causes you to sell after the damage has already been done. It is your responsibility as a trader to identify these emotions and strive to keep them under control.
9. Scale out of your position
When it comes to selling stocks, there is no one right answer. The
advantage of scaling is that you are not all right or all wrong. With positive trades that have worked out well, some traders rec at least three scales. Sell a portion of the position to get your principal back; A second scale out when the initial investment has doubled.
10. Sell using technical indicators
Some pros use technical indicators to help determining when to sell. Moving averages, divergences, Cumulative Indicator, volume of institutional buying and selling. Pick your favorite and have at it.
Sincere notes that its not enough to know how to sell — you also need to have the discipline to follow through and execute.
10 Smart Selling Strategies