Lesson 1. Cutting Losses
The first sell rule is to get rid of any stock that falls 8% below your purchase price.
It’s critical to follow this loss-cutting rule regardless of how highly you value a stock. Personal opinions get in the way of smart selling decisions.
The larger the loss, the higher the recovery you need to get back to the break-even level. (A 50% loss requires a 100% gain to break even.)
Strong stocks sometimes initially retreat close to their buy point (as determined by the stock’s chart pattern). This doesn’t necessarily mean you have to sell, unless the stock goes 8% below the purchase price.
Avoid making sell decisions based on tax concerns or commission rates.
Lesson 2. Taking Profits
A simple, clear-cut strategy is to sell after your stock has gained 25%, unless the stock has gone up 20% in just one to three weeks.
Stock charts are especially helpful in spotting signs of weakness in stocks, often providing clues much earlier than any fundamental indicators show.
Look for climax runs, exhaustion gaps, failed breakouts, significant violations of the 50-day moving average and other characteristics of a weakening stock.
Remember to check the market direction daily. If the market comes under distribution and weakens, your stocks will have a hard time making any further advances.
Lesson 3. Selling Indicators
Consider selling a stock if it shows fundamental signs of weakness, such as a steady deceleration in earnings or sales.
Watch for weakness in the stock’s industry group. When the leading stocks in an industry decline, the other stocks in the group may typically go down, too.
If there are signs that mutual funds are consistently selling the stock, you should consider selling.
Too many stock splits close together in time can push a stock lower.