Whats Easier: Knowing When to Buy, or When to Exit?
Learning To Sell
Its funny how CNN Business tells you what to buy, but they never tell you when to get rid of a company? Most traders are left with the big question: how do I sell my stock
Even Market Edge 360 is guilty of that sometimes. Our rationale for not providing any advice on when to exit from a specific stock is easy: Each investor has their own unique style of trading and their own unique way of weighing in on their own preference for risk and return. Its always best for the individual investor to decide when to pull the chute and exit from a position, since the selling strategy must match their own trading style. Yet, unlike all those other guys, we have a couple of suggestions that will help you know when to exit.
If you ask any successful investor, they will tell you that selecting a stock is simple. Its the exiting part that is the toughest. You can spend hours looking for the best time to buy, you can spend hours investigating a company, countless more hours watching as it moves higher or lower. Its not tough to gain an attachment after spending so much time together. Its that attachment that makes knowing when to sell all the more difficult.
Here are some suggestions:
After a Stock Moves Higher
a) Don’t let greed take over. Its easy to start counting your new found wealth before its in your bank account. Protect your profits by having a trailing stop loss in place. By placing a stop loss 5-10% below the current price (you can also use tonight’s closing price if you can’t follow the action during the day), you can lock in a profit (or protect yourself from a larger loss). If the price closes at $10, set your stop loss at $9.00 or $9.50 depending on your risk / reward tolerance. If the price dips below your stop loss, you’re out of the market while others are holding onto a stock that is moving lower. Its always a good idea to lower your stop loss the higher your gain. For example, if you buy a stock at $5, you might place your first stop loss at 10% below that price ($4.50). As the stock moves higher, place another stop loss, but at a lower stop loss, perhaps, say, at 5% if the stock moved to $10 (setting your stop loss at $9.50). This trick will help you to keep more of your money. Remember, 10% of $5 is $0.50, while 10% of $10 is $1.00. Multiply those amounts by the number of shares you’re holding, and you can see why we suggest using a smaller amount for your stop loss.
b) Don’t get greedy. If your stock doubles, sell half your position. This way, you can let your winners run without risking your original capital. That’s what the name of the game is. Keeping the capital and adding to it.
c) Now that the price moved up, if you didn’t already own the stock, would you buy it today? When your answer is no, its time to sell. If you wouldn’t buy it at the current levels, why would someone else?
d) Use technical analysis. When your chart is saying its time to sell, don’t question it, just do it.
After a Stock Moves Lower
This should be the easiest thing to do, yet is the hardest. This is where many investors make mistakes, costly mistakes. Don’t let fear and doubt question what you know is the right thing to do.
After you have spent hours looking over every inch of info a company can produce, and you’ve laid down your hard earned money, there is nothing in the world tougher to admit than to say you were wrong. At the end of the day, the market is right. All of the due diligence doesn’t mean a thing if the majority of people don’t agree with your conclusions. A stop loss will help. If you buy a $5 stock, set your stop loss at $4.50 or $4.75 and keep it there. If you get hit, its better to stop your losses at 5-10% than to let them grow higher. Remember, 50% losses started off as 5% losses. If you get stopped out, take your lumps and go back to the drawing board. You missed something, or the rest of the world missed something. Either way, there are not enough buyers ready to buy your shares for more than you paid for them.
Fear will not allow you to make a rational decision. It can and will paralyze you and make you sell at the bottom or hold when you should sell. Stick to your plan. You wont hit homeruns each time at bat, but if you can keep your losses low, when you finally hit that homerun, you’ll have more money to enjoy it with! Stock market investing is not easy - but it can be profitable.
Food for thought:
If you started with $100 000 dollars, you could make set your stop loss at 10% and make 37 trades before running out of money. Set your stop loss at 5%, and you’ll be at bat 76 times. Set your stop loss at 3% and 128 chances are yours. Needless to say, it doesn’t take a genius to figure out that if you can make a profit when you have at least 37 chances, trading is not for you. Not everyone has $100 000 to start off with, so odds are, you’ll have fewer chances. Increase your losses, and you wont be investing after only a few trades.
