How to Sell Stocks after the Stock Market Fairy Has Smiled Upon You
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Ah yes, the trickier circumstance of how to sell stocks that have earned you a profit.
As part of your
stock trading plan
you'll have to determine how to sell stocks that are profitable, and you'll find it’s a bit of a tight rope act. The advice runs from "lock in a set percentage gain" to "let the price run." It’s quite the conundrum isn’t it?
It's definitely one of the tougher questions a trader faces - how far to let a stock drop before you sell it? Five percent, 10% or 20%? The balance between trigger happy and patience is a delicate one. It’s almost like dealing with a petulant child. You want to give them the rein to choose to act like the wonderful human being they are and also set certain guidelines that must be enforced so things don’t get out of hand.
When evaluating how to sell stocks with a gain, part of your sell strategy will depend on the length of time you like to hold a stock. The shorter your hold time, the narrower your stock sell criteria. The longer your hold time, the wider the criteria.
If you’re a long-term investor your selling criteria might be a sell target that allows for a drop of 15-20% of the stock price. And, as a shorter term trader, it might be 5% or less. So before you set a sell target on a profitable gain, you must know the normal amount of time you want to hold a stock.
After you decide how long you want to hold stocks, a valuable tool for selling stock is the trail stop. A trail stop does just what it sounds like by trailing or moving up as the price moves up to a higher high and it can be set using a percentage or a dollar figure. The great thing about the trail stop is that it takes the selling pressure off of you and puts it on the price action.
You just have to decide how tight you want the selling mechanism to be based on your hold time. The trail stop amount can be calculated by using the Average True Range (ATR), a moving average price point, a fixed percentage or dollar amount.
Here are some ideas for where to place a stop or a trail stop, including:
- Price breaks below a moving average
- Two moving averages cross (e.g., 10-day below a 20-day, 50-day below 100-day)
- A set price or percentage amount trail based on ATR
- Recent price resistance point
- Technical – indicator based trend reversal - PSAR, ADX
- Any combination of the above
There are also reasons to tighten the trail stop:
- The stock price loses momentum, becomes weak technically and breaks a rule. If you are familiar with technical indicators and an indicator reaches a sell signal for your strategy, it's time to tighten the stop.
- You see a candlestick pattern you don’t like. If you use Japanese Candlestick price patterns and you see one that looks like a reversal pattern, it may be time to tighten the stop. You could also combine a candlestick pattern with a technical indicator signal for confirmation that a reversal may be nearing.
- Significant fundamental change like quarterly earnings move lower for two consecutive quarters. Remember, let price be your guide. If the stock is going to falter due to fundamentals the price will let you know, but sometimes you can capture more of a profit.
- The stock price begins to fall dramatically. That's sort of self explanatory and your basic trail should work for this situation.
- The stock price goes up dramatically. Sometimes when stocks gap up really high in price it's a bullish signal and the stock continues to move higher. Other times, the move is just so strong that extreme profit taking will occur which deflates the stock and oftentimes it doesn't resume its upward movement.
The key here is to pick a rule and habitually adhere to it. It does no good to have a rule and fail to stick to it.
...and may the Stock Trading Fairy smile on you!
If you’re struggling with any of the emotions around selling take a look at How to Sell Stock When Emotions Start to Kick In.
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