When To Sell Stock: Here's The Best Tool For Knowing When To Unload Your Investment by Alexander Green, Chairman, Investment U.
SmartStops comment: Another excellent article from Alexander Green, the Oxford Club’s Chairman of “Investment U”. However we would disagree on a couple of points. The article suggests a 25% trailing stop but our SmartStops formulas have been proven to work much better.
(See our comparison study)
Also the article says: “Under no circumstances should you lower your stop.” As you have observed our stops are frequently moved further away as volatility increases so that they are not triggered by random price action. That is one of the important pieces of logic that makes our SmartStops so much more effective than a simple 25% trailing stop.
Excerpts: Anyone can buy a stock. The art of investing is knowing when to sell stock.
There are a number of theories about when to cash in your chips. But most of them are misguided. And some are completely wrongheaded.
For example, any analyst who urges you to sell a stock because the market is about to tank is immediately discredited, in my view. While there are certainly many bear markets and bull markets ahead of us, no one - and I mean that literally - has ever demonstrated any proficiency at warning investors in advance.
If there is truth to any of the great maxims of Wall Street it's this one: cut your losses and let your profits run. Selling a rising stock, by definition, is not letting your profits run.
There is, however, one sell discipline that forces you to do just that. It's called a trailing stop. And if you're not using one to protect your stock positions, you should be.
A trailing stop is simply a stop-loss order set a certain percentage below the market - and then adjusted as the price rises.
Traders, who are short-term oriented, will always want to run their sell stops closer than long-term investors. But even a short-term trader shouldn't run his stops too close to the market. Why? Because no stock moves up in a straight line. And you don't want to get knocked out of a winning stock while its just going through its normal fluctuations.
There is plenty of research to back up the idea of running trailing stops, incidentally.
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