Protecting profits

You make money on the stock market by buying low and selling high. This is often difficult, as you may believe that a stock will keep rising and you don’t want to miss out on more profit.

However, remember the diversification rules: do not have more than 5% of your capital in one stock and keep to the criteria you set for stocks. If a stock at the 5% limit suddenly starts moving up strongly, you should sell a number of shares to keep the position within the maximum limit.

Selling isn’t always easy

Successful and disciplined investors who employ stock-picking systems portrayed on this platform typically require two factors before they sell a position.

  1. Fundamental data reason: a stock no longer meets the predefined selection criteria mentioned in the success formula and drops out of the list.
  2. Technical price reason: a stock loses upward price momentum (also called ‘steam’) and starts to fall in price.

Following only the first rule is prudent, but can create a situation where one sells a stock too early, just when it finally starts a strong upward move. To solve this problem, we can employ a simple price rule devised by stock operator William D. Gann in the 1930s.

The Gann “Rule of Three”

Gann found that stocks that are in a strong position and show a good up trend seldom ever react into the third month.

So our technical rule, looking at monthly charts, is to sell a position if one of the following conditions is met:

The past two months consecutively closed lower than the previous month and the daily closing price (anytime during the third month) breaks below the previous month low price

Rule of three (1)

The third consecutive month closes negative again

Rule of three (2)

To make life easier for platform users, our system calculates this Gann rule too and displays the status for each monitored stock daily by green (rule not violated) or red (Gann’s selling rule has been triggered) dots.

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