Selling of Your Own Stock – Planning Your Exit Strategy
The reason most investors lose more money than they should is because they lack a proper exit strategy. The investor falls in love with a company and when that companies stock heads south, they hold on to it just hoping it will bounce back. Other investors are holding a big profit when the stock suddenly tanks and they end up taking a big loss because they didn’t know when to get out.
Knowing when to sell a stock will not only help you lock in profits, but will also help you from incurring any big losses should your stock go the wrong way.
Before you buy any stock, you must plan your exit strategy
My primary exit strategy when I first buy a stock is to sell it should it fall 8% to 10% below my purchase price. If you lose 8% on a stock, you only need to make about 9% on the next stock to get your money back. A stock that loses 30% needs a 45% gain on the next stock to get even. A stock that loses 50% needs a 100% gain on the next stock to get even. How much stock have you bought that made 100%?
As you see, keeping the losses small makes it so much easier to recoup a loss.
As the stock rises, I raise my sell price. For example, if I buy a stock at $100 my sell price is $91. If the stock rises 10% to $110, I adjust my sell price upwards. In this case, I might set my sell price at $96. I continue this as the price rises. Fortunately, most trading platforms have the ability to do this for you. Look for something called a “trailing stop”.
Everything that goes up must come down
Eventually every good stock tanks and comes crashing down. Instead of waiting for the price of my stock to drop to my sell price, I like to cash out sooner and keep more of my profits.
To accomplish this you must keep an eye on a chart of your stock. There are a few signals to look for that foretell your stock is about to crash. The first thing to look for is a climax run. This is when a stock rises 40% or more in one week. Now it MUST rise this amount over a period of three to five days (not just in one day). Each day over this period the momentum must build. For example, the first day it may gain 2%, the next day it gains 5%, the following day it gains 10% and perhaps the last day it gains 25%. You want to sell into that rally towards the end.
Another signal a stock has tanked is called “stalling and churning“. This occurs when a stock has been climbing for some time and then one day, at the stocks peak, you see big volume in the stock. Perhaps two to three times more than average, definitely more daily volume than the stock has shown in weeks or even months. On top of this, the price of the stock remains unchanged from the previous day. This shows that the number of sellers is increasing. It’s time to get out at the top.
Hopefully from this article you’ll be able to make wiser decisions when it comes to selling your stocks. Preserve your portfolio by cutting losses quickly, and protect your profits by looking for the signals that tell you when the run is over.