Let's say you're sitting in a stock that has enjoyed a long winning streak. You're reluctant to sell, despite some signs that the big run is finished. When do you absolutely, positively have to sell?
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It's at this time that the 200-day moving average (or a 40-week moving average on a weekly chart) comes in handy.
A moving average, which calculates a stock's average closing price over a set time period, shows a stock's general price direction. The 50-day and 200-day moving averages are widely used indicators of intermediate and long-term trends, respectively.
The 200-day average is found by adding the closing prices of the last 200 sessions and dividing by 200, then repeated the next trading day. Doing that creates a line that puts a stock's day-to-day action into context and helps to identify long-term support.
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Most investors sell when a stock breaches the 50-day line in high volume. In many cases, they're not sitting on a big enough profit to risk further loss of hard-earned gains. But investors who have already racked up big returns have more flexibility.
When To Sell Stocks: A 2011 Case Study
MercadoLibre (MELI) broke out above a 27.52 buy point in a cup with handle on July 15, 2009, in heavy volume. The stock had a compelling story as the eBay of Latin America, an online marketplace for the region's increasingly wealthy population. Fundamentals on the day of the breakout were stellar — a 99 Composite Rating, a 91 EPS Rating and a 92 Relative Strength.
Most investors probably would have sold when the stock sliced through its 10-week line in huge volume on Jan. 11, 2010 (1). But those who truly liked the stock's long-term growth potential may have decided to wait until it breached the 40-week line in big volume. After all, they were still sitting on a profit of more than 50% despite the sharp slide.
The stock went on to form new bases and hit new highs, punctuated by sharp drops to support at the 40-week moving average (2). The stock peaked at 92.73 in the week ended April 29, 2011, representing a gain of 337%.
The final sell signal came during the week ended Aug. 5, 2011, when the stock finally plunged through the 40-week line in heavy volume (3).Those who sold would have locked in a gain of 258%. By October that year, shares fell as much as 48% below their 52-week peak of 92.73.
A version of this column was first published in the May 10, 2013, edition of IBD. Follow Chung on Twitter at both @SaitoChung and @IBD_DChung for more on growth stocks, chart analysis and stock market insight.
A stock that drops below the 200-day moving average indicates resistance. The buck in the trend points to a bearish shift in the stock's price. As such, it means that investors may be losing confidence in the stock and consider selling their shares if the price continues to decrease.
A simple trading strategy would be to buy shares that are above their 200-day line and sell them when they dip below. IBD founder William O'Neil considered a drop below the 200-day average a late sell signal. Other sell signals will appear before the 200-day line is violated.
When To Sell And Take A Loss. According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions.
As a stock price rises, investors can begin selling the position once it reaches the price target range. Investors can either sell it all at the price target or ease out of the position over time at various price targets.
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
The 200-day SMA, which covers roughly 40 weeks of trading, is commonly used in stock trading to determine the general market trend. As long as a stock price remains above the 200-day SMA on the daily time frame, the stock is generally considered to be in an overall uptrend.
What is a Golden Cross? A Golden Cross is a basic technical indicator that occurs in the market when a short-term moving average (50-day) of an asset rises above a long-term moving average (200-day). When traders see a Golden Cross occur, they view this chart pattern as indicative of a strong bull market.
The 8, 13, 21 Exponential Moving Average (EMA) strategy employs three EMAs: the 8-day EMA, 13-day EMA, and 21-day EMA, each offering insights into market trends and potential trade entry and exit points.
The market is uptrend when the 9 EMA is above the 21-period and 55-period EMAs. The market is in a downtrend when the 9-EMA is below the other two. To enter a long trade using this strategy, first, you look out for a cross of the 9 EMA above the 21 EMA while both are above the 55 EMA.
The 10-month moving average strategy is a type of market timing strategy that helps investors make informed decisions about when to enter or exit the stock market. This strategy relies on calculating the average stock price over a 10-month period and using this figure as a benchmark.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
According to the 20%-25% profit-taking rule, your profit-taking range is still based on the ideal buy point ($120-$125), not the actual buy point ($122.4-$127.5). Therefore, if you exit your position when the stock price reaches the profit-taking range, your actual profit would be around 17.65%-22.55%.
The fifty percent principle is used to predict how much value a stock will lose during a correction. It states that if an asset drops after a price increase, it will lose between 50% and 67% of recent price gains before rebounding.
An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.
Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
Earnings and earnings per share (EPS). When you divide earnings by the number of shares available to trade, you get earnings per share. This number shows a company's profitability on a per-share basis, which makes it easier to compare with other companies.
Winning stocks increase in price for a reason, and they also tend to keep winning. Don't sell a stock just because its price decreased. Every investor wants to buy low and sell high. Selling a stock just because its price fell is literally doing the exact opposite.
Introduction: My name is Van Hayes, I am a thankful, friendly, smiling, calm, powerful, fine, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
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