When to Sell a Stock
That's Going Down

Every trader is going see some stocks decline from the purchase price at one point or another. The trick is not to lose your shirt, but contain the loss to just a small amount. A trader can easily sustain several small losses, but not ones that lose 50% of a position or more.

As mentioned in Learn How to Sell Stock When Emotions Are Kicking In, think of it this way, you might willingly lose $100 on one stock for a gain of $500 on another and that’s the sort of attitude you have to have to not stress yourself out about it.

If you don't know when to sell a stock and you let the price sink, weeks and months can go by waiting for it to come back. That is time you could have been in a position that was earning you money.

Nobody wants to lose out on a gain if a stock price reverses after selling, but believe me, you’ll feel 10,000 times better by getting rid of the financial and emotional drain if the stock continues downward. As an investor, you're in this for the long haul and being in complete control will give you the confidence and capital to go the distance.

Contrary to much advice about when to sell a stock, the number one reason for selling a stock is price. If you let price be the ultimate determining factor for selling stock, you remove the problem of indecision around selling. Let me say this again – as a trader that wants to make money, price should always be the controlling factor for selling.

Because the stock price is either in trouble or it’s not. It’s sort of a Taoist approach for when to sell a stock. You remove ego from the action and let the stock price range until it sells. In trading or investing, your ultimate goal is to harness a price movement for a profit.

With the selling responsibility on price, the next step is to generate a plan.

At the beginning of a trade, two ways to sidestep losing too much of your capital is to use portfolio sizing and by placing a stop loss on every new stock you buy or sell. So before you even enter a trade you have two capital protection devices in place. You can then add those selling rules for your positions to your stock trading plan. There are many ways to create rules for selling and here are some ways to do that.

As mentioned above, the overriding factor to sell a stock is always price. The first thing to do before entering a new position is to determine at what price you will sell that stock if it begins to go down. Immediately after entering that new position a stop loss is placed at the maximum allowed loss. It’s your line in the sand, and if the price moves beyond that line the position is closed out. The great thing is that it becomes a mechanical system and the stop loss will do the hardest part of trading for you. The deciding. It also limits how much you will lose.

Even though I use an indicator for my trading, I always have a threshold for when to sell a stock based on the stock’s price and a stop loss on at all times. At an entry, this is how I protect against damaging losses and later, it's how I protect gains.

There are several ways to identify your bottom line price for risk from your entry point:

• A set percentage
• A set amount of money
• Based on a multiple of the ATR of the stock

If you want to use a set percentage as the downside risk that can be a standard figure of 7-8% or whatever amount you feel comfortable with should the position become a losing one. The issue with a set percentage is that all stock prices move differently and if the price moves more than 7-8% in a day, you'll get stopped out. The same issue stands with choosing a set amount of money.

Either of those ways are fine, just understand what is likely to happen based on how price is behaving.

The final option for when to sell a stock takes into account risk and a stock price’s volatility. The ATR of a stock is it’s Average True Range or the average amount the stock price ranges over a period of days and it's discussed in detail in stock market portfolio sizing (ATR).


In the example below of LCAV, the green arrow indicates the buy at $9.05 with a stop loss of two times the ATR which equals .64 making the stop loss $8.41. Within four days the stock sells out and as you can see that is a good thing because it settled into a range bound market and then gapped down. However, if you have a good strategy this should be more of rare occurrence than the norm.

There are two things to keep in mind, if most of your stocks are going down, you’ve either got a problem with your strategy or the market has changed direction and is adversely affecting your positions. It’s ok to be in cash during a down market if you don’t want to short. And even in a down market, some long positions may still hang in there.

Knowing when to sell a stock empowers you and you'll know you’re not helpless when facing a loss. You control how much you’re willing to lose or how long you're willing to hang around and wait for it to return.


Ready to shift the emotions that make it difficult for to sell stock when you're in crisis mode?


Go to Stock Trading Systems for the next step in Stock Trading Success.


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