When to Take Profits | Stock News & Stock Market Analysis - IBD (2024)

FAQs

When should you take profits in the stock market? ›

According to William O'Neil, a noted investor and stockbroker, you may consider selling the stock when its price has gone up by 20%-25% from the ideal buy point.

As IBD founder William J. O'Neil says, "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again." After a significant advance of 20% to 25% from a proper buy point, consider selling at least some shares into that strength.

The 20%-25% Profit-Taking Rule in Action

View the chart markups below to see how — and why — you want to take most profits once a stock is up 20%-25% from its most recent buy point.

30 March 2024. The 20/25 rule for mutual funds is a simple and effective way to diversify your portfolio and reduce your risk. It states that you should invest in no more than 20 mutual funds and no more than 25% of your portfolio in any one fund.

The best way I've found to "know" when to take profit is to do a thorough study of your last 100 trades. Go over each one and log the maximum profit potential that existed before it turned against you (you will need to define what that means). Then tally up all the trades that went 1x risk, 2x risk, 3x risk, etc.

It's called the eight-week hold rule. If your stock produces a gain of 20% or more within three weeks of breaking out of a proper base, you may have a true winner on your hands. IBD research shows that in many cases, stocks that make this quick and powerful move are capable of doubling or tripling in price.

Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.

If the stock falls 7% or above, from the entry price, it triggers the 7% sell rule. It is time to leave and exit the position before it becomes any worse. This way, investors can stay in the game for future opportunities by saving capital. The deeper a stock falls, the harder it becomes to break even.

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.

What is the best take-profit strategy? ›

A very popular profit-taking strategy, equally applicable to option trading, is the trailing stop strategy wherein a pre-determined percentage level (say 5%) is set for a specific target. For example, assume you buy 10 option contracts at $80 (totaling $800) with $100 as profit target and $70 as a stop-loss.

If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock. This is in contrast to a covered call which involves selling a call on a stock you own.

Trading profits should still be withdrawn regularly but not with the intention to cover all of your bills. A good exercise is to pick the smallest fixed monthly expense you have and withdraw enough profit to cover that each month.

Profit booking closer to a financial goal helps to safeguard the goal corpus. Profit booking is best done in a systematic way to rebalance the portfolio on an annual basis, if the asset allocation deviates by say more than 10%.

In other words, the Rule of 20 suggests that markets may be fairly valued when the sum of the P/E ratio and the inflation rate equals 20. P/E + Inflation = 20. The stock market is deemed to be undervalued when the sum is below 20 and overvalued when the sum is above 20.