When to Sell in Stock Trading?
Once you’ve grown more acclimated to the investment periodical landscape you’ll begin to notice that many of these sources of information only seem to tell would-be stock traders how to get into stock trading, often neglecting those who are already trading on their own account. Despite there being many questions about getting started, there are just as many questions involved once you’ve begin practicing stock trading techniques that need to be addressed. One of the most valid questions to ask once you’ve created a portfolio for yourself is what is the most optimized time to sell?
To justly answer this question we have to first figure out the scope of your investment strategy, are you planning on day trading and jumping in and out of stocks on the fly or do you plan on taking a longer approach to investment by purchasing shares in good companies that you can hold for a very long time.
One of the most famous long-term stock investors is Warren Buffett and when asked this question he has responded that the greatest time to sell a stock is never. Of course, Buffett himself has sold his holdings in the past and for various reasons, but some ideas to keep in mind are:
Sell when the market is overvalued.
This is a tough thing to call, but some surefire signs that the entire market is overvalued and is at the peak of a bubble are when the majority of stocks are at their record 52-week highs as well as having a very high price to earnings ratio compared to average.
Sell when there is a better deal out on the market.
If you find a stock that is very undervalued and you believe the company can make a turn-around, but all of your cash is tied up in stocks you already own then it’s a good idea to sell shares in underperforming stocks or stocks that have stagnated for a few years in order to free up cash to fund this new purchase in the promising company.
There are many reasons to sell, but those are two of the most common reasons. Just remember to make sure that you’re selling for reasons which make sense on paper. Don’t sell to buy a stock that everyone else is buying because chances are the stock has already become overvalued or the market is at its peak and everyone is trying to make their way in to make a quick profit. Stick to your principles no matter what your emotions are telling you when deciding to sell a long-term position.
The key to the day trading approach is to not get greedy. You have to keep in mind that you’re in constant competition with many other expert traders who know that greed is what gets you killed in stock trading. In day trading there are also a couple key reasons to sell your positions:
You’ve made a great return for the day.
As I just mentioned, it’s not good practice to let yourself be greedy just for a few more points of return. The key difference between a good trader and a great trader is one knows when to let go and sell a position.
It’s the end of the day and your margin cash needs to be back in your trading account.
Often when you’re a day trader you’ll try to take advantage of leverage by opening a margin account and trading with loaned money. The key with most margin accounts is that in order to not get charged any interest for using the money you have to have the cash back in your account by the end of the day because you get charged for the money you’ve used to buy shares. Speak to your brokerage company to find out more about margin accounts.
You made a wrong decision.
Let’s face it, as human beings we can only take in so much information at a given time to make a sound decision, and when you are part of a complex adaptive system like the stock market it’s tough to stay ahead of any sort of curve because there are people and companies out there who have much better resources than you do. If your stock begins to take a turn for the worst, it’s better to cut your losses early than to let it drop in hopes of a turnaround.
When you’re a day trader you’ll find that much of when to buy and sell depends on the types of securities you trade, because you are dealing with a different market each time and the players who are experts in those markets have adjusted over time to create a particular market environment. It’s good practice to watch how a market trades for a while before you jump in and begin trading with real money. With enough experience and drive you can be the niche leader in any trading environment.
Photo by Ian Muttoo