​When to Sell

​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. Combinations 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.