Jul 15 2005
A Discussion Of The Most Difficult Part of Trading - When to Sell Your Stock
Posted By Tate Dwinnell
Question:
I am struggling a bit with my profit taking sell rules. I do pretty
well selling positions that aren’t working to keep my losses small.
However, I have trouble holding on to my winners. I either sell too
early wanting to bank that profit (especially after a few losses in a
row) or watch a winner turn into a breakeven or small loser (I try to
limit my winners from becoming big losers). I am trying to do the
O’Neil 3 to 1 thing but find many of my purchases never quite make it to
the ~20% level before they correct.
Do you have specific sell rules?
Any ideas in this area would be much appreciated.
My Response:
It’s a good question - selling to take a profit is the most difficult part
of investing because there are so many if’s, and or buts.
Honestly, I don’t have specific sell rules but do follow certain guidelines
you’ll want to consider:
1. I almost always sell before an earnings announcement
2. Typically, you’ll want to lock in profits around 20 - 25% in a strong
market, but towards the end of a bull run or in an iffy market, consider
taking profits at 15%. So instead of a (20% - 25% to 7%-8% ratio) use a
(15% to 5% ratio). If you look at my model portfolio, you’ll notice that
the average gain is around 15.5% and the average loss around 5.5%. Maybe
consider taking profits at 15% while keeping losses small. You can be right
less than half the time and still do very well.
3. Did the the stock break out with force and run up quickly then
consolidate quietly? Is it still exhibiting good price and volume action
(heavy buying, light volume selling). If so, this could be a big winner for
you and you may want to hold out for profits more than 20 - 25% in a
strong bull market.
4. Look for a change in trend of price and volume as a signal to lock in
gains. A good example is CBG, a current Model P. holding. Beginning July
5th, buy volume began to subside as it edged higher. Of course in hindsight
I should have locked in that 20% profit right then and there. At the time I
was thinking that post holiday trade was skewing the volume a bit and high
volume selling hadn’t yet appeared. Now that they have appeared I am
looking for an exit point, preferably around 45, if it can get that far. I
still have a decent chance of locking in 15% profits before earnings.
5. Don’t forget to pay attention to upward trend lines as well as prior
resistance points as well. They can provide good predeterminded sell
points. A good example of this is DCAI, another current holding in the M.P.
This is a stock that has carved out a deep base, with resistance at the high
in the left side around 35. Would I continue holding if it hits that high?
No, I’m taking very nice profits off the table. Deep bases have a much
higher failure rate, so it’s unlikely that DCAI gets to 35, carves a nice
handle and shoots to the moon. I’m just looking for a nice run in the right
side and unloading.
Selling is somewhat of an art form and you will never be perfect. If you
can keep losses small and maybe move your profit target closer in a bit, you
will be successful.
I have certainly had my share of blunders. In 2003, I took a quick 50% gain
in TASR, that cost me 10’s of thousands in the long run. At the beginning
of this year, I let large gains in DHB, XXIA and TASR slip away in the Model
Portfolio and have been chipping away all year to recover those losses. It
is important to track your trades and learn from mistakes. Be flexible and
adjust.
I think you’re on the right track, just a few minor adjustments.
Member Response:
Thanks. I agree selling is the most difficult but probably the most
important as well. I have tried to adhere to the 3 to 1 mantra but most
of my stocks purchased have corrected before they hit the 20% range and
then I hold on too long for either a small loss or gain. I have more
recently been willing to take 12 - 15% gains but then feel my stops
become a little too tight and get stopped out of good trades.
I have since widen my stops a bit but try to keep losses to 4 - 5% and
then take 10 - 15% gains, especially in a less than raging bull.
Do you see value in a 1st level profit target where you would sell 75%
of your position and a 2nd profit target to sell the remaining 25%? I
have always talked myself out of this type of selling but know
evaluating the merits again. What are your thoughts?
My Response:
If you’re buying at the correct time, cutting your losses at 5% should keep
you in the majority of trades, provided you have good entry points. Maybe
take a look at your entry points and the quality of the base? I’d be happy
to take a look at a few if you’d like.
I do see some value in taking partial profits depending on the situation,
but I’m more of an all or nothing trader. This keeps the number of
positions to a minimum and keeps commission costs lower. It really depends
on the company. I think that the solid, established companies like an
Apple, Starbux, Google ,etc this method can be a good one for locking in
profits ahead of earnings. For example, I will most likely take 50% profit
on Google before earnings are released (on the 21st) and let the other half
ride. If the stock drops to support maybe I add back that other half. If
the stock soars on the earnings, you still gain on the other half. However,
with more volatile, unestablished companies, the best option is to usually
sell ALL before an earnings report.
Generally speaking, I think it’s best to avoid getting too cute with
selling. If you have the solid 20% gain, take it… ALL of it. Just
remember the signs of what to look for with the potential big winners, which
might provide larger gains.
http://selfinvestors.com/tradingstocks/mail-bag/the-most-difficult-part-of-trading-when-to-sell-your-stock/
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