Thursday, October 26, 2006

Selling Strategies

It's interesting that so many of us will spend a great deal of time studying the perfect time to buy, yet so little time on when to sell. Ironically though, we may be better served by focusing our efforts on the latter, since the sell side of the transaction actually puts money in our pocket. There is plenty of literature available on the subject of 'when to sell', but today I'd like to highlight some of the most helpful sell rules that you can take and apply immediately.

1) "I never buy at the bottom, and I always sell too soon" - Nathan Rothschild. As difficult as it is, you want to sell stocks when things look like the stock may soar forever. As we all know, all good things do come to an end, and it's far too easy to let a 30% gain turn into a 20% loss because you're trying to squeeze out a 35% gain. You may ultimately leave some profits on the table, but better to leave some profit on the table than none in your pocket.

2) Keep in touch with a company's fundamental data. All of the fundamental research that we do typically comes prior to making the investment, but many times the company's financial statements after you invest in it will clue you in on a pending downturn. If earnings or revenue taper off, you want to be one of the first ones aware of that, prior to a sell-off. (continued below)

3) In Bill O'Neill's Book 'How To Make Money In Stocks', he summarizes good money management (capital protection) with this simple quote, "The whole secret to winning in the stock market is to lose the least amount possible when you're not right." While it's always more enjoyable to dwell on winning trades, it's important that you protect your investment capital. If you allow yourself to take large losses, you have diminished the amount you can put into your next winning trades. This is why it's crucial to use trailing stops, exit rules, and be willing to accept that every trade is not going to be a great trade.

4) For those of you who use technical analysis to generate automated signals, you don't necessarily have to use the opposite of your entry signal as an exit signal. You may find that an entirely different technique than your buy signal gives you better, and more profitable, exits.

Remember, selling is half of the challenge, and you should devote half of your efforts to making sure you're selling at the right time. You will find the results are an efficient, more profitable portfolio.

Good day and good trading.