When should I sell? XYZ is down 15%, should I bail? ABC is up 50%, should I sell it all? These are questions that tend to frustrate me. Not that I get upset at someone for asking, but the answer is so dependent on each person and their situation, and I don’t know how to quickly and articulately answer them without writing an essay on the matter. Using charts isn’t really about being able to predict what every stock is going to do at any given moment, at least that’s not how it works for me. I use them to spot those very specific and few setups where I believe I have the odds skewed in my favor, along with a nice risk to reward ratio on the trade. When someone asks me if they should sell, basically they’re looking for me to predict what will happen with that particular stock, but unfortunately years of experience still doesn’t prevent you from guessing wrong.

Being wrong is part of being a trader, but minimizing the damage done when you’re wrong is a key skill to succeeding in the long run. Sure, if someone asks me if they think they should sell XYZ because it’s down 15%, I can tell them if I believe it’s at support and whether or not I believe support will hold. Even then I don’t know where their entry is, and if I did, I still don’t know what their position size and risk tolerance are. Assuming I had all that information, I still could easily be wrong about whether or not XYZ is going to bounce or not, or in what time frame it’ll bounce. Maybe the person asking me is a very impatient trader and doesn’t want to wait a week for it to bounce, so that’s still more information I need to determine an opinion. See why it’s tough to answer? It’s just so much simpler to get you to make these decisions for yourself, and in the end you’re going to be so much better off for it.

So how are you going to figure this out for yourself? For starters, I suggest you have a good understanding of the setup you’re trading. Some of the common ones are listed and described under the setups tab at the top of the screen. Read about them, absorb what you can, apply it to your daily trading and observing, and please ask any questions you may have. After that, I highly suggest you read the article I wrote on my favorite entry signal, trigger points. A resistance point, or trigger point, or whatever you want to call it, is basically just buying on the break of key resistance, when you believe the overall conditions to be favorable for buying. Both of these things, determining what key resistance is and when overall conditions to be bullish, require a lot of subjective analysis that will improve with experience.

One reason I like to use breaks of key resistance as entry points is because for the most part, it gives you a nice line in the sand that you can use to determine who’s winning the battle, the bulls or bears. To overly simplify things, if the old resistance/ trigger point/ new support continues to hold up and the price stays above it, then the bulls are in charge. If the sellers force the action back below it and the price gets stuck there, then the bears are back in charge. When you buy on that break of resistance, you can use a break back below it as a scenario where you stop yourself out. How exactly you do that will depend on a few things, but mainly how much room do you want to give it. I can guarantee you that if you stop yourself out on the first tick that goes back below that trigger point, you’re going to end up stopping yourself out on some plays that do end up successfully breaking out. I recommend giving it at least a few ticks, and really the biggest thing I look for is where the stock closes at. While I’m on that subject, that’s a good lesson that applies to a lot of scenarios. If you’re trading off of the daily chart, remember that there will be plenty of times that an intraday pullback will look scary. If it can recover and close strong though, then it’s only going to be noise. Don’t let the shorter term noise mess up your trade plan, but don’t ignore it either, since short term noise can turn into a longer term change in direction.

While that last paragraph specifically referred to entries with nice, clear cut trigger points to them, the basis behind it was to use support and resistance to give you relevant stops (and applies to many scenarios). Sure, you could just choose an arbitrary amount, like 10%, and say that if the stock falls that much, then you bail. My problem with that is it’s not dependent on the chart you’re trading, just a number you chose in your head. A 10% stop may be great for one stock and it’s current setup, but it may not be enough for another. If the stock is volatile, you may want to give it a lot more room to move, in which case your position size should be adjusted as such (see article on position size). Basically, choose an area of support, and use that as your line in the sand to determine whether you stay in the trade or not. Just remember that the market loves to fake people out and take the price below obvious support areas, mainly to shake out weak hands and get the shares into stronger hands.

OK, everything I’ve gone over here has to do with selling when support breaks, otherwise known as selling into weakness, but ideally you’re going to be doing a lot more of the other type of selling: selling into strength. This refers to selling your position, possibly in blocks, as the price moves up. No matter how good your eye is for setups, you’re never going to know for sure which stock will go up 25% and then turnaround, and which ones will continue to go up hundreds or thousands of percent. For this reason, I like to advocate the use of selling in blocks. I’m not saying you have to do this on every trade, sometimes you may feel that the setup isn’t really good for a sustained run, so you may just dump the whole thing into the first rally you get. However, for those setups that you feel have the most potential, those are the ones I recommend selling in blocks along the way. Whether it’s in two portions or ten, break the selling down into tiers. That way if it goes up, you still get to take part in the higher prices, but if it stops and stalls, you’ve still locked in profits. Remember, to be a successful trader has nothing to do with catching every last dollar on any one specific trade, it has everything to do with making the most money possible over the long run. Selling in blocks will never get you the maximum amount of profits on any one trade, but it’s a method that will keep you consistently profitable, and more importantly, sane. Not sure what I mean by that? Just wait til you sell everything for a 20% profit only to watch it climb hundreds of percent in the following days, or hold onto an entire position that’s up 50%, only to see it eventually turn into a loss. The nicest setups can fail just as easily as the so-so ones, and the so-so setups can turn into the biggest runners you’ve ever seen. All you can do is play the odds, and selling in blocks helps you do this.

So where and when do you start selling into strength? I’m sure a lot of you can predict what I’m going to say: Use your best judgment. You can always target obvious areas of resistance. You can target at, before, or after them. You can use an intraday chart and look for sell signals on a much shorter time period. You can use the daily chart and wait for a sign of weakness there. You can just use your experience and try to gauge things by your own intuition that you’ve developed over the years, or you can use a combination of any of these things. My main point is this is something you’re going to have to feel and figure out for yourself. If I had some sort of textbook method for nailing the tops consistently, I’d share it with you. I’m still pretty bad at actually determining how high something will go and especially executing selling near the top, but selling in blocks has kept the bills paid, despite a ton of money left on the table.

Simon has been a full time trader since 2006 and currently runs a site dedicated to helping others learn his trading methods and strategies. There’s a wonderful community of traders at his site and everyone is encouraged to join in on the action, regardless of your experience level. If you are interested in learning his methods, have questions on the subject, or just are looking for trade ideas, come check out the site.

http://flippingpennystocks.com/

Article Source: http://EzineArticles.com/?expert=Simon_P_Martin

The whole subject of whether or not you should employ stop losses is one that divides a lot of people. Some people swear by them, whilst others will either begrudgingly use them or not bother using them at all. So should long-term investors employ a stop loss or not when investing in stocks?

Well in my opinion it all depends on what kind of stocks you like to invest in. For instance if you are a speculative investor who likes to invest in bombed out stocks that may potentially recover in years to come, then it’s probably best to take your chances without a stop loss. This is because even if a few of these companies went bust, you can still make excellent returns if you manage to find a few stocks that end up multi-bagging, ie where the share price goes up 2, 5 or 10+ times higher than the price you paid.

If, however, you like to invest in mid or large cap stocks, then I think it’s imperative you use a stop loss. The fact is that even the largest and most well-known of companies can see their share price plunge very quickly when the wider market starts to head downwards. Just look at the share price of many of the leading banks in recent years.

So because of this, you really do need to protect your capital by having some kind of stop loss in place. It’s always better to take a small loss and come back to fight another day than to keep holding on to to falling stocks in strong downward trends in the hope that they will eventually bounce back.

You don’t necessarily have to set stop losses with your broker for every stock you hold. I personally set mental stop losses of around 20% and will close out a trade myself if the price of one of my holdings ever falls this much. It’s actually very rare for one of my shares to fall this much because I try to buy high quality stocks at the bottom of a cycle, but on the rare occasions they do fall this much, I will always sell them because it often means there is something fundamentally wrong with the company, and therefore the stock price is likely to continue falling.

So to sum up, I would say that if you have a sizeable share portfolio and like to manage your own money, then you need to protect this capital by managing any losses that you may incur. If you don’t, then there is always the chance that a few of your holdings could fall 40 or 50%, for example, or even go bankrupt in extreme cases, destroying your share portfolio in the process. If you take a loss of 10, 15 or 20%, however, it’s a lot easier to bounce back. Plus of course you can always buy back into these stocks if they start to recover.

Click here to read a review of Stock Trading Nitty Gritty, the new training course that teaches you how to successfully trade individual stocks.

Article Source: http://EzineArticles.com/?expert=James_Woolley

Annotation: 2009 reprint of 1960 edition. Hungarian by birth, Nicolas Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviets took over, he fled at the age of 23 with a forged exit visa and fifty pounds sterling to stave off hunger in Istanbul, Turkey. During his off hours as a dancer, he read some 200 books on the market and the great speculators, spending as much as eight hours a day studying.Darvas ploughed his money into a couple of stocks that had been hitting their 52-week high. He was utterly surprised that the stocks continued to rise and subsequently sold them to make a large profit. His main source of stock selection was Barron’s Magazine. At the age of 39, after accumulating his fortune, Darvas documented his techniques in the book, How I Made 2,000,000 in the Stock Market. The book describes his unique “Box System”, which he used to buy and sell stocks. Darvas’ book remains a class (more…)

Review

Not long ago, MagicDiligence reviewed Mary Buffett and David Clark’s Warren Buffett and the Interpretation of Financial Statem…… and concluded that, while possibly useful for beginners, experienced stock investors would dismiss the book as simplistic and adding nothing new. The review also mentioned that a good alternative for more experienced investors looking to add to their knowledge is Pat Dorsey’s The Five Rules for Successful Stock Investing. Today we’ll take a look at that book. The author, Pat Dorsey, is currently the Director of Equity Research for Morningstar. Morningstar has historically been known for their 5-star scale of mutual fund ratings, but several years ago began applying the same scale to individual stocks. Since Morningstar’s focus is on durable competitive advantage, the firm’s investing philosophy correlates very well with that of the Magic Formula and of MagicDiligence. That makes the book particularly relevant and much of my s (more…)

Every stock market investor needs to be able to calculate value, profits, and cash flow in order to make basic decisions like whether to buy, hold, or sell. But it’s easy to get intimidated by all the ratios and formulas, especially when incorrect calculations can lead to costly investment mistakes. The Stock Investor’s Pocket Calculator simplifies the math behind successful equity investing. Containing over 100 ratios and formulas, the book translates them into plain English, breaks them down into simple steps, and places them side-by-side with practical examples. Readers will learn how to: * judge portfolio value * assess corporate strength or weakness (both cash flow and profitability) * follow revenue and earnings trends * and more. Filled with worksheets, checklists, visual aids, and examples, this is a must-have guide for anyone investing in the stock market.

Book Description

Every stock market investor needs to be able t (more…)