Buying stocks are gathering gains as the stocks fare well isn’t the only challenge that you would face in the stock market!
With the liability of buying stocks and garnering profits comes the responsibility of knowing when to sell.
The stock market might seem like an enticing web of opportunities for most of us who have proven to be lucky in trading before.
But it is very important to know when to get out and say “That’s it, it’s time to sell!”
Determining the right time to sell is one of the most difficult problems faced by investors across the world.
Therefore, we bring to you a set of “Sell Rules” which will help you guide the way!
Sell Rules – Why Use Them?
Though it might easy, selling at the very top of a stock’s run is very difficult to do. Fortunately, even if you don’t sell at the very top, you can still make a fortune. The key is to have sell rules that will counteract the emotions that lead to bad decisions. To put it more simply, it comes down to offense and defense.
The key rule of our defense is to make sure you never take a big loss on a position: knowing when a stock is going against you and defending yourself against receding trends can limit your losses.
On the offense, there is a huge value in selling while a stock is still advancing. Sure it might go up more without you, but if you can capture a solid gain and move on to the next stock, modest gains can quickly compound into phenomenal results. An additional part of the offensive strategy is in knowing when you might be looking at a stock with greater potential, a stock that can be held for greater gains.
These are effective sell rules to help maximize your gains and minimize potential loss.
Limit Your Losses to 7%-8%
The first rule in trading is to protect the money you have. There’s no point garnering profits, if you don’t find a way to protect your capital and limit your losses.
Hence, we bring to you a simple rule of limiting your losses to 7-8%.
Now, you might be wondering, why is the range specifically from 7-8%?
Let’s look at why!
7-8% – Why?
This sell rule of limiting losses to 7-8% is based on an ongoing study of the stock market which includes over 130 years of market history.
It has been noticed how even the best performing stocks sometimes breakout and fall to a below average ideal buy point.
When this happens, the fall is usually not more than 8% below the ideal buy point.
If the stock falls more than 8%, it is mostly due to a problem associated with your chosen entry point, the company (or its industry), the general market, etc.
Mostly there is a proper reason associated with such a fall – of course, sometimes there isn’t any. But one thing you can be sure about is that the stock price is falling and you’re about to have a possible loss of 7-8%. Hence, it is important that you immediately find ways to protect your capital and cut the oncoming loss short.
Once a stock begins to plunge dangerously there’s no way to ascertain where the bottom is. Limit your loss to 7% or 8% and get out of the market!
When to Fetch Your Profits?
One of the most important details to keep in mind for the substantial growth of your portfolio is to take profits within the range of 20%-25%.
After a significant advance of 20% to 25%, always sell into strength. Selling into strength this way would make sure you aren’t caught in 20%-40% corrections which can affect even market leaders.
Going back to the idea of 20%-25% – you must be wondering why the choice of this particular range?
20%-25% – Why?
It has been noticed how growth stocks tend to advance 20% to 25% after breaking out of a proper base, then descend to set up new bases. They also resume their advances in certain cases.
Some investors believe, it would be advisable to protect your profits rather than see them disappear as the stock prices change. Another popular advice is to accumulate these gains by investing these gains into other stocks. This is often considered to be a disciplined approach by which you would keep adding profits to your overall portfolio.
And, how do you calculate this 20-25% range?
The 20%-25% range is based on the stock’s ideal buy point and this may differ from your own purchase price.
As we saw in How to Buy Stocks, the ideal buying range is from the ideal buy point up to 5% above that price. So let’s say you bought 2% above the ideal buy point. If the stock then goes up 20%-25% from the ideal buy point, your profit would be 18% to 23%.
An Exception to Taking Profits at 20%-25% – The 8 Week Hold Rule
What is the 8 Week Hold Rule?
“A pivotal rule followed by investors around the world is the “8 Week Hold Rule”.
According to this rule, if your stock profits over 20% from the ideal buy point within 3 weeks of a proper breakout, hold it for at least 8 weeks.
If a stock has the power to jump over 20% very quickly out of a proper base, it could have what it takes to become a huge market winner.
The 8-week hold rule helps you identify such stocks, and helps you sit tight so you can reap potential rewards.”
Make sure that you apply this rule to true market leaders and not just any ordinary stock.
The market of a true market leader would be showcasing of strong market fundamentals including the CAN SLIM traits and good institutional sponsorship.
How to Keep Your Calm during a Sell-Off?
It has been noticed how a stock which quickly rises more than 20% in a very short span of time, would normally have its investors take the profits incurred off the market. This in turn causes the stock to pull back rather sharply.
Therefore, understand how stocks that trigger the 8-week hold rule usually sell off rather strongly, sometimes even during the holding period.
This rule usually cajoles you to keep your calm and avoid selling too soon.
After the 8 Weeks Mark – To Hold or To Sell?
After crossing the 8 weeks-threshold (from the original buy point), it’s advisable to either sell in order to rein in your gains or continue to hold.
If you have a solid gain along with a strong chart action and favorable market statistics, you can continue to hold your position to see how the trends play out.
If the market favors, your stock could go on to locking bigger gains in the future!