Many people are often caught out by the fact that until they sell their stocks the value is not completely secure.
Once you’ve bought your stocks at the correct time, follow them carefully to ensure you know when to sell. There are two important things to watch out for in determining if you should sell.
The first is obvious and there is little you can do to influence it – the technical indicator shows that the trend is about to, or is, moving downwards. This is why it’s useful to be able to read charts.
The second, which actually should be your first criteria, is setting valuation criteria – and when these are no longer met, selling those stocks.
Before you buy any stock, you must set criteria to determine when that stock is a failure.
You should do this before you buy, because that is when you are the least emotionally invested. What is the maximum loss you’re willing to take on a stock? That is the point at which you should set your sell-stop. Doing this will also help you calculate your position size (how many shares you want to buy).
If the stocks do well, you can adjust the sell-stop (increase it) to protect your profits.
Placing the sell-stop needs to be done with some strategy too. If you purchase stocks that are just exiting the accumulation or consolidation phase, you should set the sell-stop just below the lowest point in that phase, as a return to that point suggests that it was not complete.
If a stock starts to move along horizontally, bouncing up and down in a limited range, it could be a consolidation phase before it goes up again, but it could also mark an impending decline. Place a sell-stop just under the lows of the troughs here too.
For a situation when the price rises from a normal higher trough in an uptrend, but the move fails before exceeding the last peak, you should sell as soon as the price has fallen below the last trough.
Placing of your sell-stops is a great technique, often forgotten by amateur investors, to minimise risk and protect profits.
However, the old adage ‘no risk, no reward’ holds here too. Set your sell-stops up to 2% below the trough lows, as markets are not that precise and speculators may trigger sell-stops to quickly and cheaply accumulate stocks at, in their view, bargain prices leaving you with no position watching eventually the stock going even higher..
Before you buy any stocks, you should be thinking about selling them. Do it when you’re not emotionally tied to them and make sure you set performance criteria and failure definitions. This will help you sell stocks systematically and protect your profits.