When to sell your Stocks, Bonds and Mutual Funds? Stock Trader’s Guide to Knowing When to Sell.

June 8, 2010 by · 60 Comments
Filed under: Stock Trading 

Here are the process of going from a stock idea to an actual decision to buy or sell.
1.    Look at the trend
We want a rising trend or one that is just starting to do so.
2.    Find nearby support and resistance levels
We are trying to find stocks where demand exceeds supply and new supply is not likely to develop soon.
3.    Determine if the current trend is healthy
We want prices to be above a relevant moving average, but not so far that the stock is prone to a snapback decline as profit taking sets in.
4.    Check volume and momentum indicators
We need to be sure that they are not fading as the stock price rises: A falling indicator warns that there might be technical problems before price action sours.
5.    Find out if the stock is leading a benchmark
Is the particular stock at least matching the performance of the market and its peers?

Knowing When to Sell
One mistake made by many investors is not having a plan to sell what they have bought. Stocks, bonds and mutual funds are often put away in a portfolio and left there indefinitely, until either the bonds mature or the stocks and funds are sold at probate. For the latter, the rationale is that stocks return 10% or so over the long-term and therefore will be higher by that amount each year no matter what.
Of course, that sort of buy-and-hold-forever thinking caused investors to ride the bear market of 2000-2002 all the way down as some of their holdings lost 75-99% of their value. Even a blue-chip name such as JP Morgan Chase bank shed more than three quarters of its value during that span. Stocks, it seems, can indeed go down.

For professional money managers and individual investors alike, these are the reasons to sell a stock:
1.    A calculated price objective was reached
2.    The investment simply did not work out as planned and the risk/reward picture changed
3.    Prices fell by a predetermined amount or percentage and selling at a loss would limit that loss to a small amount
All of these reasons are variations on the idea that we would not make a fresh purchase of the stock at its current price regardless of the price of the initial purchase.

Let’s look at these three reasons in some detail.
1.    Price objective reached
If we buy a stock believing that it will rise 25% over two years from whatever analysis we use and it meets that goal, we should take our profits and move on. The only reason to hold on longer is if the charts and other analyses say that there is a second price objective likely to be met. In other words, we would buy it at the current price if we did not already own it.
2.    The investment did not perform
We do not want to hold on to a stock forever hoping that it will finally start to go up. We also do not want to hold on to a stock that develops negative chart patterns or fundamental problems before it reaches its objective. Just because analysis said it was good does not mean it will do what we want.
3.    Stopped out
A stop is a price level at which we give up and admit we made a mistake. We cut our losses, stop the financial bleeding and move on to something better. Does this bruise the ego? Sure it does, but ego is not how money is made. Leave your ego at home and honour your analysis objectively. This old saw bears repeating: ‘All big losses begin as small losses.‘

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