Wednesday, November 3, 2010

At What Percentage Drop Should I Sell A Stock?

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I’m back today to answer one of my reader’s questions which was at what percentage drop should I sell a stock? I guess the answer to that depends on whether you just bought the stock or have had it for a while and it’s had a run up in price. I take my general rule of thumb from the CANSLIM strategy which is to cut all losses at 7-8% of my purchase price.

In practice however, I think it’s wise to sell a stock sooner if you feel it’s not acting right. By not acting right, I mean that it shows signs of institutional selling (closing lower on high volume). Also, you’d want to sell sooner if the general market direction turns into a correction.

Deciding when to sell after a run up is a little more difficult. I suggest again that you pay attention to the price and volume action of the stock. If the stock’s price declines on more days that it rises, it’s time to take a close look at selling that stock. Also, if it’s had a significant run up in price, don’t hesitate to lock in your gains if you feel something is not right. There are plenty of opportunities in the market.

Ultimately, what you have to do is set some general guidelines and after that you have to let experience be your guide. Here are the steps that I would take to fine tune your skills in buying and selling stocks.


  • Set a hard and fast rule that you will sell any stock if it goes 7-8% below your purchase price.

  • When the current IBD outlook is changed to “market in correction” sell all of your stocks regardless of their gain or loss.

  • Once a stock reaches a 20% plus gain strongly consider selling it.

  • Keep a trading journal that you can review your winners and your losers.

  • Check the chart’s for the stocks you sold a month later, two month’s and three month’s later to see if you sold to soon.

  • To gain more experience, use a simulator.

Most of your problems in determining when to sell can be solved by picking better entry points. Spend your time identifying proper buy points and improving your recognition of chart patterns and you’ll get stopped out less.

I’d also suggest that you focus on what I call your “batting average”. Keep track of all your stock buy and sells. Shoot for a 1 in 3 or better average. I like to classify my trades as follows:

  • Outs: Any stock trades that I have a loss or only a small gain.

  • Singles: Any stock I sell with a 20% gain.

  • Doubles: Any stock I sell with a 40% gain.

  • Triples: Any stock I sell with a 80% gain.

  • Home run: Any stock with over a 100% gain.

When you are new. Focus on hitting singles. You’re working on getting on base. After you’ve gained some experience, pick your entry points better. Review your at bats and see if you could have stretched those singles into doubles.

On the flip side, review your outs and see if you could have recognized when to sell sooner or maybe improved your buy points.

I hope that helps you improve your stock market investing results. Let me know if I can help in any other way.

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