Below is the second part of our 3-part series on when to sell your stocks. As they say, selecting a stock to buy is relatively easier than deciding when to sell it. Hopefully, this series of tips can help you improve your own trading plan (which means you should have your own!). As always, caveat emptor.
Sell to cut your losses.
Another difficult thing to do. When I was starting I used to hold on to my losses even if its 40% deep already. I wanted all my trades to be profitable. Ain’t gonna happen kid. Now my priority is keep my portfolio profitable regardless of what stocks I ride to achieve that. Don’t fall in love with a stock. Minimize your losses. Personally I use 7% loss as benchmark. Some use 8%. The closer to this number the better. Check below “Loss Recovery Matrix.” The bigger your loss goes, the much bigger it needs to recover, percentage-wise. If you’re down 3%, you need to 3.09% price increase to breakeven. But if you’re down 20%, you already need 25%. Down 50%? You need 100% price increase just to breakeven. Sometimes we focus too much on the actual price to breakeven or recover, but we fail to see the fact that it needs a bigger effort percent-wise to stage the recovery (lower denominator, higher percentages).
More seasoned traders have this. As price goes higher their stops go higher too. This way you get to protect your gains, and not just sell when all gains are wiped out and you’re down 7%. Sell when your trailing stops are hit. Breached resistance and which is now support can be your stop too. More sophisticated systems use moving volume weighted average prices (MVWAP) as potential stops since there was higher buying activity there, presumably more bullish protection. If this is breached then bullish people are no longer buying at that price, then it might go down further. Cool eh? But this is more difficult to compute. Have your own trailing stops to protect your gains.
When bearish trend is confirmed.
This involves a more intermediate knowledge of candlesticks charting. A bearish cloud engulfing, a bearish pattern, a hanging man, a harami etc. There are patterns that indicate that the trend has changed to bearish and being familiar with these gives you an advantage. Again, seeing one does not necessarily make you sell (if bigger trend is still bullish), but you should be on the lookout for these.
When RSI says it is overbought.
RSI is one of the easiest-to-read indicators so make sure you know it. When it is overbought, profit taking will soon commence. Again remember, you’re not the only one who has gains, and some people are sane enough to take some profits if they sense the stock is getting overbought and is losing momentum.
When there’s a cross in MACD or stochastics.
Again these indicators are easy to understand so I suggest you try them in your charting tools. Both indicators have two lines (fast / shorter moving average and the slow / longer moving average). If one crosses the other, there is an impending change in stock price direction whether bullish or bearish. I personally prefer using MACD and fast stochastics. Fast stochastics is more volatile and is usually the first one to signal the change in trend. Cross in MACD usually comes a few days after. Fast stochastics though can show many crosses in as many days but it’s not necessarily a major change in trend but just a few days change in sentiment. As such I find it much more useful to balance the two. Stochastics – to signal impending change, and MACD usually confirms it a few days after.
The higher the volume the more indicative the direction is. If you see a bearish candle with high volume then that may indicate that panic selling has begun. If there is breach of support with high volume, same banana. If a stock can’t pierce through resistance but low volume compared to previous days, it might be that big players are just pausing for a while and but they are still bullish with it. Volume gives you a sense of how other market players are reacting.