Are you worried about getting into the stock market because you feel it is way too risky, and it feels more like gambling to you? Maybe you think you’ll have the same risk as if you had taken your money to Vegas to the black jack table. I think a lot of people think that way. I used to think that way. But the more I learn, it is my style and rules of trading that make it risky or not. Here’s the bottom line. When selling stocks, you have to have rules!
Granted, there is no guarantee that you won’t lose money. I’m writing this after a tough week, and I lost some money in spite of my sell rules. But I’m still up in my account overall. The reason I am still up is because I have learned and tweaked my sell rules that keep my gains and limit my losses.
Number One Rule – Have an Exit Strategy!
Here’s my poor example. When I purchased my first stock a couple of years ago, it was such a scary thing to do. I had never bought a stock before in my life. So, I made my first purchase and I was so proud of myself. Whew! I did it! BUT, I did not have an exit strategy. I was hoping it would go up, but I had not made any sell limit prices if it went immediately down or how far I would sit with it if it went up. I don’t even remember the result of that trade, just that I was just watching it go up or down and letting emotions decide on whether to sell it or keep it.
And I made the same mistake just a couple of months ago. The market had crashed and it was time to start making a very small trade to test the market. So I bought a stock and I realized that I had no exit strategy for my stock. That was when I created an excel spreadsheet to at least give me some concrete sell prices for every stock I purchased.
RULE #1 REPEATED – HAVE AN EXIT STRATEGY!
ALWAYS have an exit strategy before you even purchase your stock. I can’t emphasize that enough! Know the price you are going to sell it if it goes below your purchase price and know the price you are going to sell it for a profit. See Selling Stocks to Lock in Profits. I use a spread sheet that I enter my purchase price, and I set it up to automatically figure out my loss and profit prices for that stock. Then every evening I manually enter the closing price of the day and see how close it comes to either of those prices.
When to Sell a Stock at a Loss
This post will solely concentrate on when I sell for a loss as I have learned, heard, and made my own rules that work for me. You of course will determine your own rule(s) with your style and comfort level of trading.
I was first introduced to the 7 – 8% loss rule in the O’Neil’s book How to Make Money in Stocks. The theory is that if you bought 4 stocks and 3 of them immediately lost money and you sold them at 7 -8% losses and 1 of them made you a 25% gain, then you are still ahead by a percent or two. But if you let your stock(s) run more than a 7-8% loss, now your winning stocks have to increase by so much more which is more improbable. So NEVER break your loss rule. If a stock goes down to your sell rule price, admit that you were wrong and get out right then, no matter what!
No Amount of Hope Will Make a Stock Go Back Up!
There is NO amount of hoping that will bring the price back up. Just sell it and move on. The market could care less of what you hope for or how much money you have lost or would like to make.
I lost 1/3 of my portfolio because I did not follow this one simple sell rule. “Surely it will go back up,” I thought. And it didn’t. It still hasn’t. And I still regret it. I finally sold the stocks 2 weeks ago as I accepted my gigantic mistake and decided to move forward. When the market crashed in February, I dumped all my stocks except these two. I thought because they were REITS (real estate investment trusts) that they were different and my sell rule didn’t apply. Your sell rule should apply to all individually traded stocks! See The Good, The Bad, and the VERY Ugly!
If this blog only helps one person to avoid my mistake, it will be so worth it to me. My loss can be your education.
You Don’t Always Have to Wait for Your Full Loss Percentage
Now that I actively trade stocks and my huge mistake is only a thought away, I have started using the 7-8% sell rule but I’m tweaking it a bit. I do not let it go all the way to that 7-8% rule if I think the stock isn’t acting right. Again, I got that decision from a trade I made.
Pay Attention to Your Trades
I bought a stock from the advice of a trusted person, and I verified that advice with another trusted person. Since it was thumbs up from both of them, it must be a good stock to buy, right? So I bought it. But that day my other stocks were all going up in price and this new stock was going down. The next day the same thing happened, and I noticed that it wasn’t responding as it should. I kept it until it hit the 7% loss rule and then I sold it. It never acted right, especially compared to the rest of the market. I should’ve sold it at a 4% loss, and I could always buy it back when it started to show some strength again. So I have decided I don’t have to wait for a stock to get to that 7% rule. Sooner can be better.
Another Stock Rule Thought
There is another loss sell strategy I ran across that I might try. It’s to sell half of my stock when it hits a 5% loss and sell the other half when it hits 10%. If my elementary school math skills still work, I think that might be a 7.5% loss overall. That still falls in line with the 7 – 8% sell rule. I could still sell the other half at the 7% loss and lose even less.
Create your own stock sell rule
Maybe you don’t want to take a 7% loss on your trade. You can make it less. It’s your money and you can make your own rules. Just remember that the market is always moving up and down and sometimes you might be forced to sell too soon if you make your loss too tight to your purchase price. When the market was starting to rebound, I sold a stock actually a couple of dollars higher than I had bought it because it had made even more profit. I didn’t want to take any loss and and wanted to keep a small gain. But it dipped below my sell price and triggered my sell order but quickly rebounded much higher. So I lost out on that return trip that happened too soon for me to jump back in.
Too Busy to Watch Your Stock? Place a Sell Order.
If I am not able to sell a stock at any point of the day, I put in a sell order that will only happen if that stock reaches that price. Let’s say I bought a stock for $50. My 7% loss on that is $46.50. So if I’m not in a position to act on an alert I created, then I put in a sell order to sell it at $46.50. That way if the stock tanks in price super fast, I have created a plan to get out when I want and not suffer a bigger loss.
Ask Your Brokerage Firm How to Place a Sell Order
My firm I deal with has a one day order or a 60 day order. So if I put it in for only one day, I’ll have to remember to put it in the next day if I need to. Or, if I set it up for 60 days, I’ll need to remember that the other order is still in there if I choose to sell it later, perhaps at a profit. I’ve been learning to check my orders to make sure there isn’t something there I forgot about.
If You Buy a Stock at a Proper Buy Point, You Will Have Less Losses
If a stock is breaking out of a base, the success chance for a profit is much higher. But if you buy stock at the wrong time, you have greater risk of those losses. For example, if you buy a stock on the way down like I have (twice,) most likely it will keep going down (and they did.) It seemed like a good deal because it was cheaper. You have already set yourself up for a losing stock trade. If you buy a stock that’s really extended (it’s been quickly going up in price without any bases or pauses), chances are that it will come back down. That is normal action in the stock market, but if you buy at the wrong time, you will have more losses than gains.
If you keep your losses minimal by ALWAYS following your sell rules, you’ll still be around to keep trading and start making better and better trades. Then you will have more gains than losses and your money will begin to build. And that’s the whole point of investing in yourself.
Until next time,
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