But when should I Sell?

Q. I was badly hurt by the market over the last 2 weeks. But when should I sell?

I was badly hurt by the market over the last 2 weeks and did not manage my stop losses quite well hence I had to pay the price. I have invested in shares for some time now which's been going on very well until I got my hands on spread betting which I thought is a good quick profit with no experience or much knowledge required, but I was a 100% wrong. However I think that's a just a natural learning process with everyone paying the price of his own pocket.

A: Sorry to hear that you've not had a good time over the last few weeks. It hasn't been easy, has it? When to sell? Depends on your shares. Important to get rid of the real rubbish at times like this but the good stuff has a habit of bouncing back.

Most people start trading the stockmarket when it's going up (no surprise really) and it's easy to be lulled into the sense that it's a cash machine. You are right that everyone has to go through the learning curve, I did it 'in style' after the dot.com. I even managed to do it again in May 2006.

The question of when to sell is the hardest of all because greed takes over and we believe that it will all go up and we will make even more than we did before. Then, when the greed subsides we just hope that we can get back the profit we had before and when that hope subsides we tell ourselves that 'just' break-even will do. Some even convince themselves that a 10% or greater loss will do.

It's the 'n' factor. We hopefully buy at the bottom left of the 'n' and we're happy to see our investment rise. It starts to come off but we're not bothered because it will go up again, or so we hope. The bottom right of the 'n' is the time many people elect to sell but often we convince ourselves that it's ok for it to go down a little bit more because it's a 'great share' or 'the market will recover. Soon break-even starts to look like a bargain and at some point we throw in the towel for a loss.

I'm going to pick on VLK (one of my fav picks as it's a great example of what I'm talking about and I know TNT will forgive me.

I went long on VLK around 80p, a bid rumour followed. It looked good to me so I jumped on board, jumping off in stages from the top for profits broadly in the range of 6%, 4% and 2% (they were spreadbets but I price gains as though I had held the stock). Had I not sold when I did I would now be faced with a small loss. So what now? Do I take my small loss, do I wait to see if it goes lower or higher, does greed (or is it fear) keep me in the trade? No answers here, just questions. A chart will follow and it shows just how hard trading can be and how easy it is to turn a profit into a loss.

A buy and hold investor will say that it's a long end-game and that these small movements don't matter (and that would be correct) but over a much longer period than my chart will show, the buy and hold sat and watched his investment in VLK go from a high of 110 back down to the seventies. However, the buy and hold investor knows what he's doing and can afford these 'paper losses' (for that's what losing a profit is) and as he bought VLK far lower he's still well in profit. This is not a criticism of his strategy, which is based on his belief in the company, it's just that I wonder whether people who are starting out should bank (at least some) profits a little more regularly than someone like a buy and hold investor who has already built up a substantial pot of money.

All I can say is do not be too stubborn to take the hit YOU WILL NOT BEAT THE MARKET!!!!!!!!!!!! That is one lesson I learnt years ago and it cost me big time. But I now feel I am a better investor/trader for it. For instance this time I had no hesitation when the market looked soapy to ditch the lot and that I did at 10.00am. Yes you can argue that tomorrow could be a bounce back but I like to sleep and when you trade at 5-10 times margin that can be a stressful experience. You could always buy the positions back when you feel the market is right.

Stop losses are important:

"If it turns out that the company is doing well and the shares remain attractive there will be an opportunity to repurchase them. I find that this 'insurance policy' approach, although it can sometimes seem illogical, pays dividends in the long term by taking investors out of shares early in any potential decline. The risk of hanging on is that the shares continue falling and the investor eventually sells in disgust at a much lower price that may be close to the bottom of the decline.

This process of selling at the bottom is known to professional investors as capitulation. Investors hang on and hang on hoping for recovery. When they finally decide that the shares are never going to recover they often all sell together driving the shares to what may be their ultimate low point. When this happens to shares generally it can lead to a high volume climactic sell-off that often marks the low point of bear markets. A classic buy signal comes when after an extended decline shares open massively lower on high volume but end the day higher as bargain hunters are drawn in as buyers."

Lastly, another strategy rather than a stop loss is to sell the option on a stock to get out of a losing position although you can only do that with US stocks.

'If you believe in yourself, have dedication and pride and never quit, you'll be a winner. The price of victory is high, but so are the rewards. Paul "Bear" Bryant (Late, great coach of the Alabama Crimson Tide football team)'

Q. You mentioned a tactic whereby you nip losses in the bud but make the most of profits. How exactly is this implemented?

Do you sell any shares that go below a certain percentage? Is there a certain positive percentage mark where you'd definitely sell? Or do you have a minimum time period to keep all shares in order to give them a fair chance?

A: There are several strategies you can use to run profits. One involves purchasing a share and when it hits your target figure you could sell your initial investment leaving the profit shares to run. If the share then goes down you could always repurchase at a lower price if you believe the company is solid. I prefer to run my entire holding, unless it's a quickie trade, in which case I sell 100% at my target or, if I'm very confident then I may sell half...

Certain price chart patterns (together with various arithmetic data including the volume of participants, and ratio of price to sales/profits/debt/peers/etc) can sometimes usefully show if a recently risen price is overstretched, or if a sharply fallen one can be expected to bounce. Not with certainty, but with sufficient probability to justify either caution or action. Those various signals (which can be automated in line with ones own criteria using software costing more than I'm prepared to pay) combined with market news and known proximity of key dates (imminent results etc), can all contribute to deciding whether I should remain exposed or should bank (some or all) profits.

If a price rise that has taken me into profit appears to be weakening (e.g. is no longer underscored by any real volume of participants, or is contradicting certain other indicators specific to that stock), then yes there are certain percentage falls (from each new high) that will prompt me to reduce or exit a position. They differ from stock to stock (stocks have personalities; some might deviate say 10% either side of a trend without letting go the trend, so setting a target within that percentage would force an unnecessary exit. With others the same 10% deviation might trigger alarm bells. So some assessment of past chart patterns is needed before deciding in advance what leeway to allow).

An advantage using spread bets rather than actual equity purchases, is that you can make phased exits without being charged extra broker fees. This can have tremendous psychological value. I could for instance determine beforehand that I will sell say one third on a 5% price fall, another third at 10% down, and only sell the remainder if the price is 15% down. I can thereby feel that I have given the chance to that stock to rebound. Whereas with an actual shareholding the avoidance of multiple brokerage fees means setting a fixed level at which I sell the lot or don't - and that "all or nothing" moment is where many investors get stressed and come unstuck by feeling they really ought to give it "one more day" or whatever, only to then find themselves tipped into a sharp fall that is triggered by other market participants who did sell. There are occasions where I will phase my way into or out of a particular bet in £1pp increments. (£1 per point is the equivalent of buying or selling 100 shares, which is too small an increment to be viable if repeatedly applied to a real shareholding).

Q. You speak about taking lots of small losses and letting your profits run...

But don't shares tend to go down more rapidly than they go up meaning that you will get stopped out more often and lose in the long term?

A: I'll quote a reply from Robbie Burns, a renowned UK trader on this one: 'In over 10 years of investing I'd much rather buy into a strong rising share than a strong falling one. I take small losses if I think I bought into something at the wrong time - I'd let the odd one or two off a tight leash if I think it's over done - depends on the share, stake and circumstances. I do think most people find it hard to sell something at a loss and most people lose money by not taking the losses...'

 ...Continues here - Averaging Down and Pyramiding Up

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