The toughest part of trading is knowing when to sell.
That’s why it always pays to establish guidelines for what would force you to consider selling. After all, planning ahead can – and will remove the stress and the potential for error.
No. 1 – The Stock Hits your Stop Loss
When you buy a stock, the best thing to do is set a stop loss. Some folks use anywhere from 5% to as much as 25%. When it’s hit, you’re automatically out of the position. Or, perhaps you have a trailing stop loss set up to protect current gains. When and if the trailing stop is hit, you’re automatically kicked out of the position.
Both are great ways to remove emotion from a trade.
No. 2 – The Stock has Hit an Unsustainable Level
A good rule of thumb is to consider exiting a stock when the company’s valuation becomes significantly higher than its peers. Or, for example, it’s P/E begins to exceed its average P/E over the last five to 10 years. Or, let’s say the company’s revenues are beginning to decline. These are just some fundamental reasons to consider selling.
Or, let’s say you’re a technical trader.
Let’s say ACADIA Pharmaceuticals [NASDAQ:ACAD] appears to become overbought on Bollinger Bands (2,20), MACD, relative strength (RSI) and Williams’ %R, it’s often a good time to consider trimming a position.
Another great way to protect wins after a big move is to consider taking part of the win off the table. If you have a great profit, consider selling half of it, and allowing the second half of the trade to hopefully run a bit higher.
No. 3 – The Company Cuts its Dividends
When a company starts to cut its dividends, it’s time to seriously consider selling the stock. A company dividend cut is a serious issue, and it can signal financial issues you should watch for.
“While a mature company raising its quarterly dividend payment can signal optimism about its future and can reward its shareholders with a larger dividend, a company slashing its dividend payment often is expecting lower earnings and less growth in the future,” says NASDAQ. “Some companies slash their dividend payment to free up cash for research and development or expansion purposes, which is fine if you believe it’s a good move. But other times, that’s not the case. If you don’t want to stick around and weather the storm of weak future earnings, then a dividend cut announcement may be yet another indicator that it’s time to exit.”