10 Smart Selling Strategies

Most people have no idea when to sell their stocks because they don’t have a strategy.

Michael Sincere at Fidelity discusses this issue, and some of the strategies used by trading professionals to help in identifying trade exits:

1. Have a selling plan
It’s essential that you have a selling plan that is customized to fit your personality and trading style. Your trading plan must include a minimum of three numbers:

• Purchase price
• Expected selling price (dollar or percentage)
• Emergency exit price (dollar or percentage) if the stock goes against you

2. Use flexible price targets
Price targets have to be flexible because the market might not be compliant. Remember that the market doesn’t have any personal interest in your trade, nor does it care how much money you are hoping to make on a trade.

3. Use flexible time targets
Also be flexible in your holding periods. If a trade is not profitable by a certain period of time, exit the position and invest the money elsewhere.

4. Cut your losses and protect your gains
Don’t use arbitrary stop losses. Use more-sophisticated technical signals than an arbitrary percentage. Do not let a meaningful profit turn into a loss.

5. You can’t go wrong taking profits
Every trader has his or her own method for taking money off the table. (Note that this is a trader’s — and not an investor’s — strategy).

6. Using the "cockroach" theory
When applied to selling, the cockroach theory means that if you see anything wrong about a stock you own, either a negative news article or other information, you sell. The expectation is that there will be additional bad news coming.

7. If in doubt, get out
Whenever I hesitate, I get smaller. Either sell or reduce the size of his position when unsure about a stock. In general, the safest choice you can make is selling a stock you aren’t sure about.

8. Know your psychological sell signals
When you trade stocks, you not only battle the market but your own emotions. As many traders know, the two most common emotions are greed and fear. Greed prevents you from selling at the top. And fear causes you to sell after the damage has already been done. It is your responsibility as a trader to identify these emotions and strive to keep them under control.

9. Scale out of your position

When it comes to selling stocks, there is no one right answer. The
advantage of scaling is that you are not all right or all wrong. With positive trades that have worked out well, some traders rec at least three scales. Sell a portion of the position to get your principal back; A second scale out when the initial investment has doubled.

10. Sell using technical indicators
Some pros use technical indicators to help determining when to sell. Moving averages, divergences, Cumulative Indicator, volume of institutional buying and selling. Pick your favorite and have at it.

Sincere notes that its not enough to know how to sell — you also need to have the discipline to follow through and execute.


10 Smart Selling Strategies      
Michael Sincere

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  1. john commented on May 7

    Add to rule 5 – once you sell don’t look back. What you might see is a stock continuing to gain. That could color your perception the next time you are faced with the same decision. Take your profit and leave that stock alone for awhile.

    Rule 10 is the best way to keep yourself out of trouble – I use two indicators and when both say sell I sell. Again, no second guessing after the fact – a profit is a profit is a profit.

  2. RW commented on May 7

    Good heuristics but I don’t agree with the note on point 5: Even if we accept that investing is somehow fundamentally different than trading – more than simply a difference in time horizon – there are still many investing tactics that require profit taking and even strongly defined strategic portfolios require rebalancing from time to time. This may just be my bias (or lack of sophistication if you like) but ultimately all decisions are timing decisions from my POV: 10 minutes, 10 weeks, 10 months, 10 years; other than the tools you use what’s the diff?

    I’m also not sure how point 9 (which I read as a three-step scale out) is supposed to work mathematically; i.e., if you “Sell a portion of the position to get your principal back” that is when it has doubled so how can you scale out for the second time “…when the initial investment has doubled.”? Initial investment means your principal and you scaled out the first time when it doubled; by definition, no?

    Agree with john’s “don’t look back” addendum to point 5. I might offer a modest amendment that looking back some time later can help you refine your discipline but, regardless, the point is well made that indulging in the practice could cause you to start second guessing yourself – along with greed and fear, doubt is an emotion too.

  3. trader75 commented on May 7

    Ken Grant has some excellent input on this topic in his book “Trading Risk.”

    While it applies more to traders than investors, there is a potential wealth of data in studying one’s past trades with the proper statistical tools. Not to backtest or curve fit, but to get a sense of historical metrics.

    Can initial risk points be tightened? Should they be loosened up? Are exits primarly early? Primarily late? Are certain time frames more conducive to profits than others? Any bad habits that can be ferreted out, situations that should be avoided or enhanced? Any interesting patterns that can be traced back to methodology or trading discipline, rather than market noise?

  4. ed johnson commented on May 7

    Boy, this article is a piece of work.

    Rule 1 tells you that you should make sure you don’t ignore sunk costs!

    Rule 2 tells you not to stick to the plan you made in rule 1.

    Rule 8 says that people are to quick to sell losers and hold on to winners, when research seems show that the opposite is true.

    I could go on, but why bother.

  5. bam commented on May 7

    What’s the third scale??

    “three scales. Sell a portion of the position to get your principal back; A second scale out when the initial investment has doubled.”

  6. Robert Campbell commented on May 7

    Absent inside information, the only selling “rule” that makes much sense to me is Rule #10. When your investing, there is only one source of information you should listen to – and that’s the market.

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