You’ve heard the old saying “Buying a stock is easy – but knowing when to sell is the hard part”.
How many times has this happened to you? You get into a trade and the price starts heading higher right off the bat. The market is doing great and everything is working out just as you’d hoped. Maybe a few days or even a few weeks later the stock starts pulling back and you’re thinking it’s just a normal dip. More time goes by and pretty soon you turn around and the stock is all the way back down to where you bought it or worse – it’s now a loss.
We’ve all experienced this.
There’s no worse feeling than having a solid profit in a trade – then slowly watching your profits melt away as a stock gets away from you to the downside, only to have to sell it later at a loss.
This is why you need a selling strategy. One that guarantees a handsome profit will never turn into a loss.
We’ve found that using a mechanical approach to selling a stock works best. It removes emotions from the equation and eliminates the difficulty of making decisions on the fly.
Our strategy is to use a trailing stop-loss to make the selling decision for us. That way there’s no guesswork involved, and it lets the stocks price behavior tell us exactly when to sell.
Sell when your trailing stop-loss gets hit – simple as that.
The benefits and pitfalls of using stop-loss orders is a topic for a different post – but the longer you’ve been involved in the markets and the more you learn about trading – you’ll understand that using stops is a necessary evil. Using stop-loss orders prevents a catastrophic loss on any one position.
A stop-loss is the number one risk-management tool at our disposal – and it doesn’t cost anything. It’s like an insurance policy guaranteed to prevent a large loss.
The first thing we do when taking a new position is to set an “initial stop-loss” which is calculated at the time a stock hits our Triggered Trades table. Typically the initial stop will be somewhere in the vicinity of the most recent swing low.
Our system starts with high-octane stocks in primary uptrends – nearing the final stages of a pullback – then we jump on board as the main trend resumes. As the uptrend continues, the system “ratchets-up” the trailing stop, until it eventually takes us out.
The Key Benefit of our Trading System is that it Calculates A Trailing Stop-Loss Order so We Always Know EXACTLY When to Sell.
An important aspect to using stops involves actively managing them and adjusting them over time – based on the behavior of the stock after we’ve purchased it.
The tricky part of setting stop loss orders is that you don’t want to get knocked-out by normal price fluctuation.
In other words the stop has to give you enough wiggle-room to let the trade work. Once the price moves just the right amount of distance away from your Entry, the next step is to slide the stop-loss up. Our goal is to be able to raise the initial stop-loss up to or around breakeven.
Getting Our Stop Raised Up to Breakeven Eliminates All the Stress – and Means that We Can’t Lose Money on the Trade. That’s a Good Feeling.
As a stock we’re trading continues to rise, we ratchet-up the stop so we can ride the momentum for as long as it persists. Once the momentum peaks out and the stock starts to reverse, it’s time to get out and lock-in our profits. The trick is to have the stop far enough away that a small pullback and normal price fluctuation doesn’t take us out prematurely – only to see the stock continue to run higher.
That’s where things get a little tougher. A properly calculated trailing stop is key and should be based on ATR, support and recent lows in the price pattern on the chart.
Our Automated Stock Trading System employs a complex set of algorithms to calculate EXACTLY where the stop-loss should be at all times. Determining a proper stop-loss level is no easy task and we’ve programed multiple different sets of logic to accomplish what we set out to do – determine the optimal stop-loss level at any given point in time based on that individual stocks own behavior and key technical levels.
Here’s an example of a trade from our system marked with Trailing Stops (tstop) and Parabolic Stops (pstop).
We’ve actually taken the trailing-stop concept a step further with what we call “Parabolic Stops”. This is something you won’t find anywhere else.
The Parabolic Stop – Designed to Lock-In Profits
When a stock really takes off in your favor, you’ll often see the price momentum and trajectory accelerate quickly to extremely overbought and unsustainable short term levels. The system will detect this and compute a highly tightened Parabolic Stop. You can use the parabolic stop to squeeze out final profits after a good run or as a protection level on a portion of the trade holding the remainder with the normal trailing stop.
When the Parabolic stop kicks in, it’s time to protect your profits on that trade.
To sum everything up… The most effective and easiest way to sell you stock is to let it sell itself – when it hits the “hard stop” you’ve put in at your broker. Managing the stop as price moves higher – and ratcheting the stop up along with price – is the best way to remove emotions from a trade.
Getting your stop to breakeven at least insures you can’t lose money on a trade, but using an effective trailing stop strategy subsequently is the key to locking-in profits. You can ride the momentum as long as it lasts, then take your profits and wait for another good entry point.
We recommend that you always place a protective stop-loss order whenever you buy a stock – a “hard stop”. No matter how strongly you believe in a company or how confident you are that you bought in at the right time – the stock market is a risky place. Your number one goal should always be risk management and minimizing potential losses on every trade. This is why it’s imperative that you use stops on every single trade.
So how do you know when to sell a stock? When it hits your Trailing stop and sells itself.