In order to address these unproductive feelings, let's talk about one particular step in the following list of actions I take during a successful trade:
- Planning the trade including stop loss estimation
- Buying the stock
- Setting the stop
- Watching the stock move in your favor
- Selling the stock
I want to break down #5. How do I know when to get out of stock?
The hardcore value investor looks for a specific target price when the "discount" no longer exists. The momentum trader looks for a significant change in momentum. A chart trader may look for violations of support or resistance. Some traders have decided on a gain ahead of time (in step #1 above) that would make them happy. Warren Buffet rarely sells unless his original investing premise completely changes or until full value is realized.
As I write this, I'm realizing why selling is the weakest part of my game. I have not really had a standard set of criteria that defines when I sell. I have always subscribed to the method of letting the stock "tell" me when the trend is changing. This usually means letting a 12% gainer turn into a 7% gainer before I take profits. Frequently this leads to feelings of regret because I am letting gains slip away. So, here is a brainstorm on how I can avoid these feelings of regret:
- In the planning stage, choose two targets. Target #1 would be prudent and realistic gains, whereas target #2 would be "ideal"
- Or, in the planning stage choose a single, flat, realistic target BEFORE the trade is initiated
- Let your winners run. Buy a great undervalued growth story, set a stop, let the stock run, and then move your stop to breakeven and never touch it again. This is how I would LOVE to roll, but I go back and forth on how realistic this strategy is. Chicago Sean wrote a piece dedicated to the idea here.
I will continue to research this, but please let me know your own methods of selling in the comment section below.