Stocks and mutual funds :: When do I Sell to Minimize Losses and Maximize Profits ::
Now that you know all the factors for buying a momentum stock, you have to know when to sell your position to minimize your losses and maximize your profi ts. The most important thing to remember is that the market is so dynamic that anything can happen! You may fi nd a great momentum stock that meets all the seven screens. However, the moment you enter the trade, the company announces a product defect and recall. Suddenly, the stock price goes into a freefall! If you do not know when to sell your stock, you will suffer a major loss. The important point I want to drive across to you is that no matter how good you are at evaluating a stock, the stock price WILL go against you at times! You will lose money at times! In article 2 we learnt that even the best investors in the world like Warren Buffet and George Soros make wrong calls some of the time. However, even if you make three wrong picks out of six, you will still make profi ts if you learn how to cut your losing trades fast and know how to get the highest profi ts out of your winning trades. Stop Loss: Protecting Yourself from LossesOne of the most common and important strategies used by investors is to place an automatic stop loss with their broker. This means that if the stock suddenly moves down in price to a certain level (known as the stop price), your broker will automatically sell your stock to minimize your losses. As a rule of thumb, you can place a ‘Stop Loss’ 10% below your purchase price. So, the maximum you can lose if you are wrong is only 10%! So for example, if you bought CRDN shares at $46, then it would be wise to put an automatic stop loss of $41.40 on your shares. So, the moment the stock price drops and hits the $41.40 level, all your shares will be sold. If you remember, I recommended a stop loss of 20% for value stocks. The reason the stop loss for momentum stocks is only 10% is because the latter tends to be a lot more volatile and can fall very much faster, given that they are usually overvalued. Another strategy used especially by professional investors is to use the stock’s price’s previous low as the stop loss level. To fi nd this price, you have to again study the stock charts. Let’s look back at the example with GROW. Stop Loss: Protecting Your Profi ts as Your Stock Flies!Now, let’s come to the exciting part. If you picked the right stock, the stock price should have broken out of the consolidation pattern and started to move up! The most common question is, ‘when do I sell and take my profi ts?’ By selling too early, you may miss out on even greater profi ts. However, if you wait too long, the price may suddenly reverse and wipe out the profi ts you have already made.’ Now, there is no way you can predict when the stock price is going to reach the top before reversing a downtrend, unless you use advanced technical strategies like ‘Fibonacci Expansion’ which is beyond the scope of this book (we only teach this at the Wealth Academy™ Investor Mentorship Programme). So, it is very diffi cult to ever sell your stock at the highest price, however you can place a ‘Trailing Stop Loss’ order with your broker to protect and lock in your profi ts as the stock price goes higher and higher. A ‘Trailing Stop Loss’ is a stop loss order that is set as a percentage (or dollar amount) below the market price of the stock. As such, the stop loss price is adjusted upwards as the stock price moves higher. For example, if you place a trailing stop loss of 10%, it means that the moment the stock price drops 10% below the last traded price, your stock (or option) will automatically be sold. |
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