When to sell a stock
The purpose of this post is to give you a simple exit strategy to maximize trading profit when selling shares of stocks.
I personally have ridden stocks down. They are long painful rides. Some stocks go down a little each day, others collapse and never come back. You can wait years for your share price to recover and it never does. This is where the idea of opportunity cost of holding equity out weights the benefit.
Holding a stock that goes down a fraction every day – it is like being in a relationship where your girlfriend nags and is on you a lot. She gains a few pounds and the next thing you know it is she is shopping in Targets wearing pajamas and flip flops. You know you should get out but you invested so much into it and you do not want to cut your losses.
Holding a stock that crashes is like – holding an equity position that has betrayed me. It is like a girlfriend who is two-timing. You just cannot believe it, everything was going fine and boom one day you find out the real value of your relationship. It is like catching your girlfriend in a restaurant with another man on your birthday. But still, in the back of your mind, you want to make it work. You cling on to your commitment even if the reality is telling you something else.
If you see holding shares of stocks like relationships – as a guy maybe you can think more clearly and less emotionally about it. Me personally I have married stocks I knew were wrong because of emotions. It is like marrying your girlfriend you have spent years with, not because you love her but because it was the least you could do for her. Read my lips, if a stock is not rocking your world, get out before it is a long-term underperforming asset.
What would be really useful to know is when to get out of stock, an exit strategy. Almost better than knowing how to buy stocks is knowing when selling stocks. If you know when to exit, you can make money in any market.
What you need is a rule of thumb stock exit strategy so you leap with your head and not with your heart when it comes to trading stocks.
Two exit strategies for selling stocks
Choose one of these to make cut losses or lock in profits.
- Sell a stock when the stock price breaks the 12 months moving average. Some people wait a month to see if it really has broken down, others sell the moment it breaks down. Some people put in stops others use mental stops.
- Sell a stock when it falls off the selection list you used to pick it. This means if you were using a value method to choose stocks and it is no longer on the list as a top equity pick, sell it.
I prefer selling my position when a stock has broken the moving average. The reason is stock move on and off the valuation top picks very often. Even if transaction costs are low to minimal, I do not have the time. There is an opportunity cost on my time so I prefer not to be a high-frequency trader, but to plant seeds and check back from time to time.
I guess my question is if this investment idea is so simple, why do so few investors use it? Even professional fund managers ignore this. Remember the simple reveals itself after the complex has been exhausted. I personally find moving averages even more power as an exit strategy then selection criteria. The reason is in choosing a stock using technical analysis there are too many choices. Differentiating between one graph from another is hard when they all look good. It is like choosing a girlfriend based on her looks alone. You need to find out more, or screen the ones that have a reasonable level of compatibility. Moving averages for me are most valuable when timing market and exit strategies on individual stocks.
I buy more on valuations and sell on technical. This is because sometimes, the price runs wild away from true valuations, and this can last for many months or years and you do not want to miss this ride if you are already in. Rules are made to be broken but this is a primary way I trade stocks.
Other considerations when selling shares
Selling in lots to reduce risks. If you have made a profit and have a large position, some people like to sell in lots. A percentage of their share at a time. Even though the transaction cost is more it is like reverse dollar-cost averaging. It mitigates some risk. I personally do not sell shares in pieces. I am either in or out.
One big mistake of selling a stock is to get back in after you sell it. It is like a relationship if you left it chances were there was a good reason and you should not go running back to your girlfriend unless she really is the one and only for the long-term.
Each purchase should be evaluated anew. The only reason to rebuild a position in a company is if it is on the top of your valuation screens and other signals are green. That does not leap back in when some things turn better. Only choose the best of the best. Transaction cost is nothing these days with discount online trading.
I personally do not like to sell stocks at open. I do not have empirical evidence for this, but seem not to get the best execution price on open. I wait until late morning trading. I do not always work, but for me, I seem to get a better execution price.
Sell stops and limits – Use if you want, but in the long-run stock strategy counts more than trading tactics.
Set your own sale price – I am not a day trader. But one thing in life I have noticed is people that wait get what they want. If I feel the stock is not collapsing I often but in a selling price a bit higher than the open. This way, because I am greedy, I know during the day it will trade in a range and will tick off a better sell price.
In conclusion, the best way to make money trading in the stock market is to have a solid strategy for purchasing and selling. If you have a better method for exiting or timing shares of stock, let me know. I prefer a simple approach that for me has been time tested.