Once upon a time, in the fast-paced world of investing, there was a top-notch investor known for their keen market sense and impressive returns. This week, they found themselves bombarded with questions from eager individuals, all asking the same thing: "When is the right time to sell your stocks?" But alas, there was no simple answer, for each investor had unique goals and aspirations.
For those who embraced day trading or swing trading, one golden rule stood out: never let a handsome profit slip away. After all, a juicy gain today could vanish into thin air the very next day! And that would be such a shame. Our savvy investor knew that maximizing profits meant consistently making the most of every opportunity, and they were eager to share their wisdom.
Imagine starting with a sum of $10,000. If one could generate a 3% profit on this amount twice a week, the weekly earnings would amount to $600! And that's just the beginning. Carrying on with the same success for a full month would lead to a whopping $2400! A remarkable 24% return on the initial investment! Such gains would bring immense joy to any investor fortunate enough to achieve them.
Our wise investor knew that it wasn't just about luck; it was about dedication, strategy, and knowing when to seize the right moments. While they relished the thrill of turning a profit, they also knew that risks lurked around every corner. Caution and discipline were their trusted allies in this tumultuous journey.
As the months passed, our investor's reputation spread far and wide, attracting aspiring traders eager to learn from the best. They emphasized the importance of setting clear objectives and understanding the individual tolerance for risk. "Stay informed, remain agile, and never let emotions guide your decisions," they advised.
With each success and every calculated move, their confidence grew, but so did their humility. They recognized that even the best investors face occasional setbacks. However, they knew that staying focused on long-term gains, while not being afraid to take well-calculated short-term profits, was the key to their prosperity.
As the years went by, our top traders continued to inspire others with their remarkable journey and achievements. Their success story became a guiding light for many, teaching countless individuals how to navigate the tempestuous seas of the stock market with finesse.
And so, the tale of our illustrious investor reminds us that the path to financial success is paved with knowledge, perseverance, and an unwavering commitment to one's goals. Whether you're a seasoned professional or a beginner taking your first steps, the journey of a top investor begins with the courage to learn and the determination to excel.
When to Sell
It’s one thing to bail on a position to avoid deepening losses, it is another thing to sell for profit. This is the age-old question: When do you exit a position? How much gain is “enough?” What if you sell and the stock soars? What if you don’t sell and the stock collapses?
These questions tend to be more difficult than stop losses, mainly because there are no perfect answers. I tried many different systems over the years: Trailing stops, limited percentage gains (e.g., “Sell when I exceed 2%”), fixed time periods (“sell after two days” or “always sell at close”). Each of these methods has merit, but they each have a downside as well.
The trailing stop, for instance, appears attractive on the surface, until you start discovering that your position is taken out on small, momentary blips. Suppose you set a trailing stop at 1% (if the stock falls more than 1% from its high, the position is closed). In theory, this makes sense, because you will keep holding the position as long as the stock keeps climbing higher. The problem is that a stock can have a momentary “air pocket” and fall below your stop, even for a few seconds. You get taken out, only to have the stock resume its march higher. If you try to counter this with a larger (wider) stop, you throw away too much gain.
There is some merit to the limited gain method, which I have done often. This is where you decide on a reasonable gain, then set a sell-limit order for that price. If the stock trips the order, you’re out, and with a gain. This can work well overall, but the downside is that you can miss out on some spectacular gains if you sell too soon.
There is even a case for a time-limited system, e.g., having a fixed time horizon. The idea is that nothing can go up in a straight line, so if you are showing profits after, say, 3 days, it is mathematically improbable that the gains will continue. The downside to this method is that some stocks do continue, and you could be throwing away the better part of the gain.
Considering the various methods available, which one is best? The method I like the most (not mentioned above) is the simplest one, albeit unscientific: Take gains the moment you are happy with them.
Of all the methods I have tried, “take profits when you are happy with the gains” is the one I keep going back to. What does “happy with the gains” mean? It means you look at your position, and its gain, and you think, “Wow, that’s nice.” Or, “Ah, nice trade.” Take the gains and don’t look back.
I am not sure why this method is so workable, but it could very well be psychological and nothing else. Wins produce good spirits, and good spirits are a key ingredient to success, otherwise you will be playing scared, and this will cause you to sell too soon or hold on to losses to long. There is also something about Murphy’s Law that will slam you with a loss the moment you are “excited” about the results. Either way, I have never found a better method than this.
Although my favorite method is to take gains the moment I am “happy” with them, I often like to combine that with a couple of other methods. I will often decide up front what kind of gains I would be happy about, then I set a sell-limit order slightly above that. More often than not, the trade hits that sell-limit and it exits automatically.
I also like to combine the “happy-with” method with a trailing stop. The moment I am happy with a position, instead of outright selling, I will set a hard stop slightly below the current price. If I get stopped out, I am fine---and still happy. If the stock powers forward, I raise the stop. In this way, I often eek out a little more gain than the “happy-with” level.
One other combination I have used from time to time is the “half position” strategy. When I reach the “happy-with” level, I sell half the position, then set a trailing stop for the second half.
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