TheRumpledOne
6,411 posts
msg #41338
- Ignore TheRumpledOne |
2/18/2006 9:11:48 PM
When To Sell
Stockscores.com Perspectives for the week ending February 18, 2006
When do you sell? The simple answer to this important question is when the stock closes below support. However, there are a number of issues to consider in defining support and getting a sell signal.
Philosophically, you want to sell the stock when the market no longer believes that there are fundamental reasons to justify paying higher prices. Investors are not always rational in their assessment of fundamentals so sell signals are often based on emotional reversals.
Stocks will tend to make some abnormal price moves when there are new motivations to pay higher prices. Therefore, we put support at the bottom of abnormal price moves to the upside. If the stock closes below this support price, we sell.
We can define abnormal price moves in two ways. The longer term method is to use patterns. If you look at a chart, patterns in an up trend are like steps upward. Look at the chart of T.CLL for example. Notice how it makes a push higher for about a month, then goes sideways for a while before breaking out and going in to another step up? Each step has a pattern of price consolidation and the bottom of the consolidation is support.
The shorter term method is to use individual candles on the chart. A candle that is taller than the majority around it is termed a Message Candle and we put support at the bottom of the last Message Candle. If a subsequent candle closes below the last Message Candle bottom, a sell signal is generated.
This is a simplified explanation of selling that is elaborated on in the StockSchool Pro course material. With a basic understanding of the concept of when to sell, I now elaborate on how you apply it.
The sell signal should match the time frame of the buy signal. For example, if you identify a stock that is breaking to all time highs from a long term ascending triangle pattern, then you expect a long term up trend. Therefore, you should intend to apply a long term exit strategy of patterns or perhaps weekly Message Candles.
If you are looking at a swing trade set up on a break from a flag pattern then you will apply a shorter term sell strategy because the expectation for the trend is much shorter. In this case, you will apply a Message Candle strategy.
The sell strategy is complicated somewhat when you get into a fast moving stock. If the uptrend becomes very steep and the market is filled with emotion, I recommend shortening your sell strategy. If you were looking for a Message Candle breakdown on the daily chart and the stock starts to move in a parabolic up trend, switch to a Message Candle breakdown exit signal on the 60 minute chart. Basically, the sharper the up trend, the shorter the time frame for the sell signal.
This summarizes the basics of the selling strategy when you are in a profit taking position, but not all trades work. It is also important to limit losses when you are wrong.
To do this, plan your stop loss point when you are entering the trade. However, in most cases using a stop loss order is not appropriate because the market often comes down through support intra-day but then rallies back before the close to remain above the stop loss point. Therefore, it is best to exit the stock at a loss if it closes below the stop loss point, not simply moves below it.
Knowing when to sell a stock you own is a challenge greater than knowing when to buy. The Stockscores Approach uses this method which becomes relatively simple with practice. What is most important is to keep emotion out of the exit strategy. Fear and greed have no place in determining your exit points.
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