Selling is largely the most difficult part of the overall investment/trading equation and if a market player does not have a firm handle on a few sell guidelines which aid in making proper sell decisions, profits will be hard to keep, if they are ever come by at all. Below are listed a few guidelines that will help limit the number of errors which can too easily occur in this most delicate of all trading areas.
Consider selling any short term stock recommendation that languishes for 10 consecutive trading days without ever achieving its upside target or violating its downside stop loss. We are in the business of moving in and out quickly and inorder to maintain a certain degree of liquidity, we must eliminate any stockwhich attempts to tie up our capital. You might call this a “timestop, " and it is an excellent tool to incorporate into any short-term oriented trading program. In most cases, if a good part of the expected movehas not occurred during the first 5 trading days, the chances are good thatthe stock will be “timed out" or even stopped out. You will find that most of winning plays do produce a large part of their move in the beginning. This is not to say that one should not go the full distance with each short-term stock pick (max. 10 days). We just felt this point was worth being aware of.
Consider selling only 1/2 of any stock that catapults over 25% within 3 trading days. You must keep in mind the importance of capitalizing on longer-term opportunities that offer the chance of truly spectacular price gains. Studies suggest that those stocks which rocket 25% or more in less than 3 trading days are the ones that will typically go on to be the market's big winners. We usually sell 1/2 of our position in these quick 25% cases, and keep the remaining half as long as the stock stays above its break even point.
On short term trades, consider always selling 1/2 of your current position whenever you can lock in a good profit, even if you're looking for a larger gain. While it is true that many stocks go on to score very large price gains, locking in a part of your profits by selling 1/2 gives you an opportunity to profit in two ways. The smaller “trading" profit will undoubtedly satisfy that insatiable urge to take home some money for NOW. While letting the remaining half ride will satisfy the natural urge to really go for the gusto, just in case you happened to have purchased a big winner.
This is a strategy that will largely appeal to those who trade in larger lot sizes, but we have found that it can work wonders for those who initially buy as little as 200 shares. Just remember, should you decide to put this strategy into practice, never allow your remaining portion (1/2) to slip back into negative territory. The beauty of this approach is that it is virtually a no lose situation. Locking in the initial profit makes part of the “paper gain" real, while the rest of your money either makes more money, or breaks even at the very worst. This is a very important point.
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Larry Potter is a recognized authority on the subject of trading and has been publishing his newsletter, Stocks2Watch®, since January of 1998. Each evening, his newsletter contains picks for the next day and always includes a free trading tip.