When To Sell

From another GreenCat post:

Quote:
This is a theme I have been getting quite a few PM's and emails about. When to sell. If you have been in the market for awhile you have heard, "its more important to know when to sell."

This is true to a certain extent. The reason I say, "to a certain exent," is if you make a profit you have done well. The real question is and one everyone wants to know, is when to sell at the top or how do you know when its done and time to sell. This is a theme that I get Pm's or emails about.

The answer is...... you don't know. I don't know. No one knows.

Not the answer most people want to hear. But we have tools to lead us into certain selling points. For the most part we use heavy resistance as a selling point. Most of the time we are going to see it pullback some at heavy resistance. If it blows through it then it can become a buy area. Watch volume with L2 around heavy resistance points. I have noted a few times that most traders that have been doing this awhile may sell some shares at heavy resistance to protect their gains. I personally sell around 1/3 to 1/2 and see if the other can run while I tighten up my stop loss. This stop loss, however will be to protect profits.

I advocate this method because it is a trading plan. When I buy, I already know when I will be selling at either the first sell point or what my stop loss is going to be. Thats all fine and dandy but the #1 reason most traders do not follow their plan is because of emotion. If it has ran up someone has said, "its going to a dollar." And because your greed when you add up how much that will be kicks and and you want to believe them so bad that you do believe them. The product is just too good. "To good to be true"-ever heard that saying.

Though you may have a plan, you throw it out the door for greed. If you are this kind of trader, enjoy SMC because chances you will lose it all and stop showing up here. I still see this all the time about a penny stock going to a dollar. How many actually do? Only a few and they are making nice revenues. How many have fell back into sub penny? Most of them cause they are diluting.

Many of you that have read my post know I write often about higher highs and higher lows. If we are getting higher highs and higher lows we are in an up trend. By moving your stop loss just under the higher low you protect yourself. The probelem is that many of the penny stocks can move down fast- always be ready. But letting it get past that higher low is a big no no. It may regroup and come back. But they usually make a big and long consolidation move before that and then get back into higher highs and higher lows.

The reverse of this is keeping a stock that is just moving down. We try and convince ourselfs that its going back anyday now. Or some other poster believes it going up and we want to believe them.

In penny stocks, I would rather make 10 good trades getting out with 30 to 50% than 1 trade that made a huge move. Because chances are that if I got into the 1 trade that made a huge move, I still have some shares riding and don't have to worry about losing anything. I am still going to sell the rest of the shares when I think the stock is done.

You may have a stock up 1000% but you havent made a penny until you sell. Read it again because you don't make money until you sell your shares. Personally, I don't have any problems selling and I often get out to soon. But most of the time if a stock makes another setup I get in near what I sold at, without all the displeasure of the pullback. I have seen my fair share of stocks pulling back with me still in them. I learned the hard way about selling. You have got to remember, these are penny stocks. Trade penny stocks, invest in blue chip stocks.

There are other tools that can be used to help determine when a top may occur. A hangmans candle often is telling us that the stock is done or a major pullback is coming.(If we see an hangmans candle and the stock moves past it within a few days then it has turned back bullish and can be good entry)

Fibs are used a lot to help determine when a stock is going to have a major pullback. Many people use the 100% and 161% fibs for selling points. If I have a fib and heavy resistance close together its a no brainer for me to exit the stock. Please dont ask me to give a class on Fibonacci. Fibs are basically an area of support and resistance. However, on blue sky stocks Fib expansion can pinpoint the area you want to look at to sell or buy.

Fibs are also great for bounce plays. If a stock has the bottom fall out put a fib on it and buy the 161% area and you will likely be rewarded. Be advised that using fibs take pratice and must be placed on the chart in a correct manner. You dont see fibs on my stock charts because I have used them so much I learned how to take my fingers and measure them and then look at support or resistance and determine where it might land. I also put up L2 and last sell trying to gauge it before pulling the trigger.

Here is my best advice if you are a new trader and learning the ins and outs of penny stocks. Just try to stay in the game and gain experience. Never play a penny stock unless it has some kind of technical setup and the security is not diluting. If you do those two things your winning percentage will go way up.

And we must realize the biggest fact in palying all stocks, wheter penny or blue chips. No one wins all the time- no one.

If you are now confused-good. You have a lot of homework to do. It takes time before that light bulb comes on. If I make it look easy then I am happy but remember, it took me a few years. I tried everything twice. Now look above and see where I said unless there is a technical set up and not diluting and you are way way ahead of the game..

Gary makes some EXCELLENT points in his post. The bottomline is that nobody can accurately predict where a stock is going, higher or lower, who knows. The market is like a living organism, it goes wherever it goes. However, we can make educated guess about the direction based on technical (Gary's expertise) or fundamental data. Nonetheless, all of our research can breakdown and fail for any given stock on any given day due to the "dark matter" inherent to the stock market.

What is the dark matter? It's all things that we do not know about and cannot foresee. Is the company going to suddenly dilute the free float with more shares sending the price down? Is the company buying shares back on a given day to send the price higher? Is an insitutional buyer suddenly going to buy or sell a ton of shares? Will the overall sentiment of the market send everything up or down on a given day? There's a TON of factors that we don't know and have no control over.

Okay, back to the topic....when should we sell?

This highly depends on your personal strategy! Are you trading or investing?

Investors tend to hold a stock for a long period with the intent of keeping it while ignoring the fluctuations. This is done for a number of reasons, I primarily hold for dividend payouts OR because I think there's a chance the company is going to do well in the future based on fundamentals. If you're investing, chances are you don't want to sell until you need the cash. Simple enough!

Traders use mainly technical analysis (TA) to dictate they buys and sells. This takes a great deal of study and understanding. Just as Gary talks about resistance, support, Fibs and candles. You'll have to spend a LOT of time studying these aspects of technical trading. There's really no short-cut or easy way to learn/use these tools. You'll have to learn them with good old-fashioned elbow grease!

Normally, I use what I call "simplified technical analysis" because I'm primarily a fundamental trader. I make most of my calls based on the company's strenghts, balance sheet and product/service. I combine that with light TA such as chart pattern, moving averages, MACD, volume, support and resistance.

OK....so WHEN do I sell Mr.BadThad?

1) You can set a flat goal such as a percentage or cash number. For example, when I buy a trade stock, I might say "I'm selling when I'm up $500". I don't typically do this, but I will once in awhile. Sometimes I'll set a goal: I'll sell when I'm up 10%, 50% or even 100%. However, these 100%opportunities do not present themselves very often...but they do and, of course, I love them. When I'm up 100% I have an nice option. I can take a huge profit and move on OR I can sell half my shares and let the rest ride "for free" since I've recovered my original investment. Obviously, you don't have to be up 100% to use this method, but you'll have less shares as you adjust the number you have to sell to recover your money.

2) Sell at resistance. This is the better method for trading. Gary discussed this above. Resistance points are VERY easy to determine and I'm lazy, so I like to use this website to do the thinking for me:

Technical Analysis of Stock Trends | Stock Charts | Stock Screener

When the stock bumps into a resistance point, simply sell it. Sometimes, to be conservative, I will sell at the weaker resistance point. If I'm feeling the stock is going to keep moving, I'll hold for a stronger resistance point. Conversely, I'm also likely to sell if a stock drops down to a strong (most often) support point or even a weak support point (conservative).

3) Sell on news. There's an old adage among stock traders "Buy on rumor, sell on news". It's pretty surprizing how accurate this really is! The gist of it is that you buy based on what might happen fundamentally. Then you sit back and hold the stock waiting for news. When news finally comes, positive OR negative, you sell the stock when it moves in either direction. You'll either have to cut your losses or take your gains. You see this pattern over and over in the market, it REALLY applies around the time a company releases earnings. Some companies are like clockwork in that their stock will drop no matter if the earnings are good OR bad. It's kind of amazing!

Another interesting point to this is that very positive news (such as a new drug approval) will send a stock soaring. Without fail, the stock will reach an apex and then begin selling off and dropping as people take profit. Sometimes this takes a few days or longer, but holding these for too long is never a good thing unless you're investing. Sell after you have a reasonable profit and don't dismay if the stock moves higher. THERE'S NO SUCH THING AS A BAD PROFIT.

4) Sell if the stock has done nothing for you. Say you buy a stock thinking it's going to go up. You hold it for weeks, months or years, it pays no dividend and the price is pretty flat or it may even drop a bit. These stagnant stocks should never be held for long. Your money will be better served in a dividend yielding stock or a stock that is actually moving one way or the other. Don't let your money sit in a rotting hole. It's a complete waste!

5) SET A STOP LOSS! All brokers all you to set a stop loss (commonly called limit sell too). Simply set a point to have your broker automatically sell your shares based on a criteria like "ask price". In general, the stop loss should be set WELL BELOW the current trading price. If you put the stop loss too close to the current price, there's a good chance the market maker (MM) will "steal" your shares. It's happened to ALL of us experienced traders. I call this a "swoop" because I've seen the MM quickly drop the price down, absorb your shares, then put the stock price right back to where it was before the swoop. IT HAPPENS AND THERE'S NOTHING YOU CAN DO ABOUT IT! After getting burned a lot, some traders I know REFUSE to use a stop loss saying it's like "tipping your hand to the dealer". NEVER forget, the MM's are in the business of making THEMSELVES money off every transaction. They are the unseen middleman in ALL stock transactions AND they have the ultimate power to control what's happening.

6) Major market BEAR! Down market cycles happen, we've seen some serious bear markets over the years. If you get the feeling the bear is coming, it's probably a good idea to start selling some of your positions and get into cash. By the same token, if you've been riding the market down, go ahead and take your losses and sell before the market bottoms. This will help preserve your cash position so you can take advantage of the bottom when it comes. There's no magic formula for figuring out when to get back into the market. Nonetheless, when you see large cap, Fortune 500 companies down 50%, 60%, ....80% or more, it's probably time to start buying some shares!

This whole bear timing thing is VERY tricky and there's no hard and fast rules. It's more of a gut reaction based on news and world events. I've burned myself by being paranoid and going into cash only to watch the DOW rise 500 points, but I've also got lucky and ducked some big losses by being paranoid. In the end, it all works out.

I hope this helps someone! GOOD LUCK!