I have lost some of the gains because there is not much advice (certainly not in simple terms) on when to sell. Can there be more information that would include some selling guidelines?
This is a question we get about every other month. It is difficult to give specific exit points because there are so many entry points to a play depending upon what type of investor you are, i.e., aggressive or conservative. We have hard and fast rules on new positions where we don’t let a stock position fall more than 8% from where we bought it. On options we like to cut out at 25% down and always sell if we get down 50% on a position. On long term holds, violations of the 50 day and 200 day moving averages are significant shifts in character, but a violation of the 200 day moving average is usually way too late to sell a position if you follow the 8% rule. That is on the downside. Don’t get caught nursing a new position that drops more than 8%. That way you don’t take the big hit.
On the upside it is hard for us to say ‘take profits now’ because we don’t know where entry points were made. We do note support points that have been holding on the move up. If that point is broken that means a change of character and that usually gets us out of positions. The more conservative investors should watch trendlines. When a stock is riding an up trendline, if that trendline is broken and the stock cannot recover in the next session, that is a signal to exit. Why? Because the move we were riding has been broken. You can also watch short term moving averages. If a stock rides up the 18 day moving average, bouncing up off of it and moving higher but then crashes through it on higher volume, that is a change in character and signals an exit point for the conservative investor. With option plays we prefer to be much more conservative.
When to sell also depends on market conditions and the type of play. In this market (as seen in the letter from the subscriber above), it is better to take money off the table at the first sign of trouble. When the market is better, we can let a stock run more, though with options we still have the time considerations and prefer to sell on the peaks after a good run. On a breakout from a cup with handle pattern, stocks can race ahead and then come back to test the move. With stock purchases on these patterns we can let them come back and then blast off from the test, keeping our 8% sell rule in place. We do this because in a bull market, a cup with handle breakout can give huge returns if we let the stock run for us. As long as it maintains good price/volume action (up on stronger, down on lower) we let it ride. If you play options on a breakout, give yourself time if you are going to let it come back on the test of the breakout. Otherwise, if we get a big move on the breakout (15% to 20%), we often take profits when the move slows and try to pick the play up again on a test of the breakout.
