Whether you’re a trader or investor, learn to adjust your sales to avoid trouble…
When Should Traders and Investors Sell Stocks? It’s a question I’m always being asked. And while there aren’t any black and white answers, there are a couple of guidelines you can keep in mind to help you decide when you should sell your stocks, depending on if you’re a trader or investor.
And as you probably know…
While there are lots of online discussions about picking stocks, there is a lot less content dedicated to explaining when traders and investors should sell their stocks. So in this post we’ll look at some of the differences between how traders and investors sell stock. Sound good?
First, let’s make a distinction about how traders and investors should approach stock sales differently.
When Do Traders and Investors Sell Stock?
Of course both traders and investors will obviously need to sell stocks, their decisions will be influenced by completely different criteria. And while it’s okay to co-mingle these decisions to buy and sell stocks, just be sure that you know whether you’re approaching things as a trader or investor. It’s a really critical distinction.
Traders buy stocks because they’re looking for a quick move in price. They want to get in and get out, hopefully with a profit. Most traders use purely technical analysis to inform their decision making. And in that case, only technical analysis should be used to determine when they sell their stocks.
On the other hand:
Investors buy stocks because they perceive an opportunity to realize long term value. This is usually based on fundamental analysis of growth, valuation or some other special situation. Since most investors buy stocks using fundamental analysis that should be used to determine when they sell their stocks. Make sense?
The key is to sell your stock for the same reason you bought your stock. How this plays out is generally based on whether your stock is going up or down. So…
When Do Traders and Investors Sell Losing Stocks?
It’s only a matter of time before you have a losing stock in your portfolio. Whether you’re a trader or investor you are bound to have a losing stock pick at some point in time. So here’s how you should handle it…
First, before you buy the stock you should define criteria that make the trade “wrong.” This is true if you are a trader or investor. For example:
For a trader, you should sell your stock when the reason you bought it is no longer valid. So if you buy a breakout and the breakout fails, you sell your stock. It’s simple in practice but not always easy when you’re watching the money flow out of your brokerage account. The key is to stick to the plan you laid out ahead of time.
For investors, you should also sell your stock when the reason you bought it is no longer valid. And if you’re an investor you probably bought the stock because of a fundamental thesis that highlights a compelling growth narrative or under-valued opportunity. So if a material piece of news changes your thesis (like a new competitor enters the market, or a product launch is delayed) then you may want to re-evaluate and consider selling your stock.
When you have a stock that is a losing position you should sell it when the reason you bought the stock is no longer valid. For traders this will probably be based on technical analysis. Long term investors on the other hand will want to avoid worrying about short-term fluctuations in price and instead focus on their fundamental thesis.
The hardest part about deciding when to sell a losing stock is sticking to the plan. Interestingly, this is also true for when to sell winning stocks…
When Do Traders and Investors Sell Winning Stocks?
Traders and investors also eventually need to decide when to sell winning stocks too. That’s because at some point you want to lock in a win before it runs away from you. So when do traders and investors sell winning stocks?
Well, as you may have guessed, the basic logic behind when traders and investors sell winning stocks is the same as when traders and investors sell losing stocks. The main concept is you sell your winning stock when your trade idea has come to fruition. What does this look like?
For traders, this will mean the stock has hit your price target (probably based on a measured move). For investors, this means the stock has become fully valued, or your thesis has been realized. And finally, let me tell you what this looks like in practice…
When your stock hits your price target and you want to sell, it often pays to only sell 1/3 or 1/2 of your stock position. Then you can use a stop loss to sell the last 2/3 or 1/2 of your winning stock position. If your stock pulls in you get stopped out, and if it keeps running you raise your stop loss a few pennies below the recent lows of the stock. And just keep raising your stop loss as the stock goes up. This strategy allows you to lock in gains without selling too early.
Read this post for more information on stop loss strategies in particular.
And By the Way: If you’re just looking for more information about how to improve your stock trading and investing ideas then why not download the free e-book below? You’ll get insightful information into how you can more intelligently buy and sell stocks – and it doesn’t matter whether you’re an investor or a trader.