When to Sell Stock
Dec 21st, 2009
Selling stock is just as important if not more important than when to buy stock. If you follow the basic outlines of what we advocate here at practice stock trading systems, you will already have a sell target when you first enter a position. If you find yourself owning a stock and asking yourself when you should sell that stock then your mistake was made when you first purchased shares. The absolute most basic way to determine when to sell stock is to set a hard price line. Before you enter your purchase of the stock calculate the exact value per share that you are going to sell in two different scenarios. Designate a target sell price for the stock when the price goes up as you are planning. Also assign a sell price when the trade moves against you. These values are based on the technical analysis system you are using. You can also use a “ratio” sell signal. What I mean by this is that you only assign a sell signal based on your positive target. Then you would set up a sell signal for the stop loss as a percentage of your positive target. Perhaps an example would be good here.
Sell Stock example
You decide to buy 100 shares of XYZ stock at $22.45 per share for a total cost of $2,245 plus commission. Before you enter the order you have decided that your target price for the sale of the stock is $22.95. You hope to make $50 minus commissions for the trade. If we were using a ratio stop loss order of 50% of our target gains, we would sell the stock @ $22.20 for a loss of $25 plus commission. This is a very simple (albeit often used) plan for entering trades.
If you use a simple system like this it is easy to make your trade and then stop watching the market. You’ve already done your research, and made a play that you think will be profitable… no need to sit in front of the computer all day and fret over the results. Most online stock trading accounts will allow you to set up a conditional sell order that you will use immediately after you have purchased your shares. A “one cancels other” conditional order will execute if one of the two conditions that you specify are met. In our example above, those two conditions are the stock price rises to $22.95 or falls to $22.20. If either of these conditions is met then the action you specify will execute (in both cases you would sell all 100 of your shares).
The “one cancels other” order type may be the single best money management tool available from most brokers. It lets you detach from the trade as soon as you enter it. There are many other ways to sell stock, of course. This is just one of the easiest system methods to get you started down the right path. I will go into the use of the trailing stop in a later post. The trailing stop can be an extremely valuable tool for strong bull markets. Keep in mind that the 50% ratio is just an example… traders use an enormous range of ratios to sell stock. It could be that you are willing to take a loss of 200% of your target… or you are only willing to lose 10% of your target. Experiment with the numbers, but remember the point of the process. Don’t ever let yourself be caught asking whether now is a good time to sell stock.
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