Do You Know When To Sell?

That rearview mirror really is 20/20. It’s the land of woulda, coulda, shoulda.

Too often we look at stocks we didn’t buy for whatever reason and get angry. But the real fault lies in not selling at the correct time. As Kenny Rogers says:

“You gotta know when to hold ’em. Know when to fold ’em.”

We talk so much about when to buy and so little about when to sell. This overlooked side of the equation is just as responsible for your investment performance as the buy side, if not more.

Today I am going to share with you the four rules to selling at the right time so you’ll know when to take a profit and when to cut your losses.

Rule #1: NEVER Move a Stop-Loss Further Away

How many times have you done this? Put in a stop-loss only to convince yourself later that the stock is going to come back for sure, so you move the stop-loss lower.

Then guess what happens? You get stopped out at a bigger loss.

I only enter trades with a good risk/reward ratio and if the stock begins to drift toward my risk parameters I cannot alter those parameters. I pretend I’m at a roulette table. Once the dealer swipes their hand over the table, there are no more bets.

Moving my Stop-Loss deeper into the red would skew my risk/reward ratio severely. Not only would I be sabotaging my original trade, I’d be jeopardizing my next trade by taking away capital from my next stock idea. And remember, there are always other ideas. I swallow my pride, take the loss, and quickly forget about it as I move on to the next attractive opportunity.

Rule #2: Play With the House’s Money

Don’t be afraid of these Stop-Loss orders. To the contrary, you should embrace them. I could even argue that most of your trades should get stopped out. Blasphemy, right? I know. But you’re looking at it the wrong way.

I move my Stop-Loss to breakeven as soon as possible. Now I’ve taken a trade that originally had a good risk/reward ratio and turned it into the perfect risk/reward ratio. Stock goes up, Stop-Loss at breakeven, my risk is zero and my reward is unlimited.