A good rule of thumb is to have a sell, or exit strategy for every fund or stock before you even buy it. Circumstances can change quickly, so it’s important to limit any losses and protect your gains. You might have a stock that is up over 20%, and another that’s down 15% leaving you wondering: When is it time to sell? There’s no one-size-fits-all answer here and everyone’s appetite for risk is different. Here are a few strategies to get us thinking about how to play the market in a smarter way.
Let Your Winners Keep Running
Sell your under performing stocks quickly for minimal loss and let your winners run. Not all stocks continue to climb higher and higher, but sometimes we have to reevaluate our original sell strategy if our stock pick turns out to be a winner. Seasoned traders sometimes use technical analysis and the are certainly many tools available to us to learn and use. If you’re relatively new to trading, however, I would suggest to start with the basics by learning and using two exit techniques: trailing stop % and stop limit (sometimes call hard stop).
I’m a huge fan of the trailing stop because it’s flexible, and designed to retain any gains. When a stock price goes up, the stop (sell) price goes up with it. For example, you buy Amgen stock at $100 per share, and immediately set a trailing stop loss for 20%. If the stock crashed tomorrow, you would limit your loss to 20%. Conversely, if the stock price continues to move higher, the trailing stop follows along. If your Amgen stock is now trading at $200, your trailing stop is still 20% thereby locking in an 80% gain.
A hard stop is just that; the price you predetermine to sell at should the stock fall in price. You will minimize losses, and be unable to cling on hoping for a rebound that may never happen.
Scrape Some Profit
For your trades that are doing well, you might want to take a little ‘cream off the top’. This means selling only a portion of you total share count. You can sell enough to fund another trade with a new stock pick you’ve had your eyes on, or sell off enough to completely recapture your initial investment. By doing this, only your profits would be in the trade, not your ‘skin’ allowing you to sleep better at night. There’s no way to know the absolute top trading price of any stock so why not lock in some gains.