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/

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