This is not an investment guide. I have not had any significant gains in the stock market to be a stock market guru. I want you to be my friend to chatter about stocks, not a follower to do everything I say.
Learning to invest feels like a hard journey to predict the stock market. Be it by reading charts and technical indicators or by analyzing company fundamentals and future outlook. However, this is only half the story. We as investors tend to focus more on the buying part.
You do not profit or lose unless you sell the stocks that you have. Thus, learning how and when to buy without learning when to sell is like flying an airplane without learning how to land it.
I am a momentum swing trader. I value investor sentiment and market trends more than company fundamentals. In simple words, a swing trader gets in at the beginning of an uptrend and gets out when the uptrend shows down or shows signs of reversal. While it is impossible to predict trend direction every time, our ideal expectation is to time the market enough percentage times so that we can outperform the overall market returns.
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Anyways, long story short, this is my journey in determining when to sell:
1) I first started with the idea that you could sell whenever you wish as long as you are profitable. Also, since you enter only after your strategy gives you a buy signal, you may not think of the possibility of your trade going sour.
2) As I went along, I realized that both the assumptions above were faulty. A strategy does not work 100% of the time. Thus, there ARE possibilities of losses and you SHOULD contemplate on the ways to minimize your losses.
Additionally, you can’t just sell whenever you like. If you sell to early, you may underperform the overall market returns. We would be better off investing for the long-term or following the buy-and-hold strategy if our returns would be mediocre anyway.
3) For the loss part, I figured I would sell if my stock falls lower than the level at which I bought it.
4) For the profit part, I decided I would keep a fixed target. I then kept 15% profit target on every stock. After I profited 15% from a stock, I would sell and use that money to buy another stock that was at the start of an upswing. With enough repetitions, my overall track record would be satisfactory.
5) After some time of investing, it then occurred to me that my assumption of point 3 was wrong again. The stock does not care when you entered. It is gonna follow the laws of supply and demand. Thus, it is better to keep a more logical stop-loss. This is why I decided that it would be wiser to sell if the stock breaks below a long-held support level or if it broke down of a trend tunnel.
6) For the profit part, I figured it would be profitable to not be cashed out of a rising stock too soon. The reason the 15% profit target was faulty is that a stock can certainly gain more than that in an upswing.
A quote from an investing legend really hit home:
“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” – Peter Lynch.
Thus, I decided I would keep holding the winners until the charts showed anything alarming. For this, the resistance strategy has proved to be the best for me so far.
Basically, the resistance strategy is my personal assumption that in a rising stock, each high acts as a support level to another high. Perhaps an illustration will make things clear.
Also, I would sell after appearance of bearish signals, like the head and shoulders pattern, double bottom pattern, a simple gravestone Doji at the peak of an uptrend, etc.
That’s my realization so far. I could be right on my assumptions, or I could be wrong. The best way to find out? Play out your damn strategies! Buy and sell stocks with your strategy. Your performance will ultimately makes things pan out.
I will add on the points above if I get better insights.