Your Key to Selling and Maximizing Profits
Picking and buying a stock, an ETF or a mutual fund is often considered the hard part of investing, but selling and knowing when and why to sell can be far more difficult. Selling can be particularly hard if you become emotionally attached to your holdings.
Removing your emotions from the investment decision-making process can be like buying a Ford when your last six cars have been Chevys. It’s not easy! But if you follow set selling rules you will maximize your profits and minimize any investment losses.
The key to selling and maximizing profits and unemotional selling is to set rules or parameters that when met, require you to sell your investments.
Selling rules include (but are not limited to):
Decline – When a stock goes down a certain percentage or a certain dollar amount after you’ve made the purchase. Percentage drops from a high point are called trialing or high stops.
Drop in Rank – When an ETF is part of a group, but over time it falls below a certain level and is no longer ranked at the top of your group by your means of analysis.
Chart Signal – As you look at different charts for your mutual fund, the signal based on your chart of choice is a sell signal.
General Exit Signal – When you use a chart or calculation that analyzes the strength of the markets and the Benchmark gives an exit the market signal.
Rebalance – When you automatically sell at certain times of the year or after a certain number of months and then buy the most current top-ranked performers.
The challenge with “sell rules” is how to define them. In his books, William O’Neil generally recommends selling if the symbol drops 7% – 8%, while some investment software programs can actually test your group of stocks, or ETFs, or mutual funds to determine the best trailing stop to use for that particular group.
The same thing applies to where a symbol ranks in your group. One author suggests that an investment position should be kept as long as it’s in the top 10% of the group. Again, some investment software programs can evaluate where the rank cutoff should be based on that particular group. There are any investment software programs, both for sale and available for free on the internet that provide a variety of charts.
The two questions to ask yourself about investment software programs are:
1) can you set the chart parameters yourself, or should you just stick with what the providers give you? And 2) which charts should you use?
Whether or not to use a Benchmark Exit Signal or to rebalance your portfolio at specific times is really a philosophical question involving your particular trading goals and methods. There are definite arguments for using and/or not using either of these rules.
Dominick is the designer of the investment program Dynamic Investor Pro, an investment software used by individual investors and professional investment advisors for stocks, ETFs or mutual funds.