Learning How To Sell Stocks properly is essential to profitable investing because buying a stock with a clear exit strategy is the only way to prevent huge losses from decimating your portfolio.
Many investors manage to select the right stocks that are increasing in price at the time of purchase. The stock continues to increase in value creating a nice paper profirt. Then the same stock suddenly returns to the purchase price or lower resulting in close to zero profit or a loss. Unfortunately that same investor will hold onto the position with the anticipation of more price increases.
What usually happens in cases like this is that the stock continues its downward slide leading to even further losses until emotions take over and the stock is sold. Then you can guess what happens next – the stock shoots right back up sometimes moving into positive territory again.
How can this roller-coast ride be avoided?
First, an assessment of the overall market timing needs to be performed.
In general, new long positions should never be entered unless the overall market is either in an uptrend or recovering from an extreme bottoming out process. The key objective for any market timing analysis is to identify the best time to own stocks, not to identify the extreme top or bottom of a trend.
Patience should be employed to make certain the overall market is supporting generally higher stock prices before new long positions should be entered. Read more on how to buy stocks.
Most stocks will follow the general market trend and pullbacks should be expected and welcomed in a market showing bullish tendencies. Market pullbacks are healthy for the market and in turn create many buying opportunities for those who know what to look for.
Second, an uptrending stock you own becomes a sell candidate if it no longer performs appropriately for an up trending stock.
An uptrending stock should be expected to make higher-highs and higher-lows within a fairly predictable amount of time – usually by following a key indicator such as the MACD.
The following chart shows the characteristics of an uptrending stock.
Characteristics of an Uptrending Stock
This stock is making higher-highs and higher-lows on a consistent basis. When a stock fails to make a higher-high when expected it should be added to a sell list because that is an unexpected action. Assuming the stock was purchased correctly the position should at least have some profits and action should be taken to preserve those profits before they turn into losses.
When a stock makes a lower-low it is a sign that at least for now the stock has either changed its trend from up to down or is transitioning to a new down trend. This sort of action usually trips a stop loss order that is in place to prevent or minimize trading losses as much as possible.
A stop-loss order is entered at the preestablished exit price as soon as the position is in the account. This single action alone would prevent many small losses from turning into portfolio damaging positions.
Third, a new long position is never entered until the first exit point is established.
Examine the chart below to see where the optimal stop loss would be for an uptrending stock
For a stock in an uptrend the stop-loss order should be placed just under the prior reaction low. Depending on market conditions and stock volatility you might want to consider the prior reaction low – but never lower.
This stop loss order would remain in place until the stock makes a higher-high and then a higher-low. The stop order is then moved up under the new low. Stop orders are NEVER moved down in price..
How To Sell Stocks – Stop orders for a base break out
For a stock breaking out from a new base, the stop-loss order should be placed just under any of the the lows prior to the breakout move. Preference of course should be given to the highest low as that approach would preserve the greatest profits or reduce losses if the break out fails.
As in an uptrending stock, the stop-loss order should be moved up when the stock makes a higher-low after making a higher-high from the breakout move.
Again, Stop orders are NEVER moved down in price.
Real life example of how to sell stocks for profitable investing.
For a real life example of how to sell stocks we’ll examine the performance of Apple Computer – symbol AAPL – between November of 2011 and the end of 2012. Click on the AAPL chart and follow along in a new window. We’ll ignore the market timing aspect for this analysis.
How To Sell Stocks – Apple Computer – AAPL
In mid December of 2011, AAPL changed from market performance to leading the market; AAPL was now performing better than the market as a whole and so became a candidate for investing consideration.
The first real buy signals appeared when AAPL was just under $400 a share as the stock price moved into new highs. Once the price moved above $400 there was no stopping its performance until May of 2013.
A purchase of AAPL below $400 and the appropriate stop loss order placements would have kept you in this position until stopped out at around $580. This would have provided a $45% profit with almost no downside risk when using this stop loss strategy.
As AAPL increased in price the appropriate stop loss levels where located at $400, $480, $510, and then two very close orders around $580. The last stop order would have been exercised as AAPL refused to make a new high, made a lower low, and then moved into a market perform phase. Market perform means that AAPL was no longer leading the market and therefore did not deserve our investing dollars – at this time there are better investments to be had.
AAPL continued to perform with the market until August of 2013 when it once again began to lead the market in price performance. APPL could once again be purchased as higher highs were being established with the optimal stop level at about $550.
This time the leadership of AAPL did not last long, only until October of 2013 when it started severely under performing the market. The last stop of this two month phase would have sold this position with a smaller profit – but nevertheless a profit – just as the stock rolled over and promptly lost almost 30% of its value.
An under performing stock does not deserve your investment dollars and so AAPL would go on the back burner until it starts to outperform the market again.
This simple example shows the benefit of being invested in only stocks that are out performing the market. AAPL is certainly a good company but this strategy will allow you to earn profits in leading stocks, sell and take profits when the stock is out of favor, and buy back in when the stock once again leads the market.
