15 Rules for Selling Stocks

  1. The Max Loss Rule – Most are familiar with a hard sell stop placed at 7-8% below entry following a breakout. This remains a great approach for novice position traders assuming sizing is appropriate at 20-25% max. With experience, one may take this a step further by adjusting the stop based on position size and how tight the entry is to technical support. I wrote about this approach in detail here. In general, keep max losses at 1.5-2% of total portfolio size on any single trade idea and one will always live to fight another day.
  2. Taking Profits – New position traders should be looking to take profits at 20-25% gains. The majority of growth stocks will be ready to form a new base after rising to this level. Exception: If the stock reaches the target profit in under 8 weeks, the stock could be held for a full 8 weeks.
  3. 10MA Trail Stop – If a stock quickly explodes higher through the 25% profit taking zone, use a close below the 10MA as a trigger to set the hard stop at the low of the day on that close. If the stock moves back above the 10MA without triggering the stop, remove the stop and continue to trail as described. Advanced alternatives: 8EMA or even 4EMA can be used in fast moving, highly enthusiastic markets. In slower, grinding conditions, the 21EMA can be used. In addition to general market conditions, pay attention to how a particular stock has reacted to each of these listed MAs… the one to use may be obvious by looking at the stock’s history and where it tends to find support.
  4. Small Gain Trailing Stop – From talking to many traders, this is the one most beginners have trouble with. With a small gain of 6% or more (but less than 20%), a good starting point is to set the trailing stop 10% from the peak price following entry. This will ensure breakeven at an 11% gain while giving the stock enough room to wiggle naturally without stopping out because of a stop set too tight. There are plenty of variations to this rule, but I believe this provides a great reference point to start.
  5. Selling Before an Event – In general, stocks should be sold ahead of an earnings report unless the profit cushion is more than enough to cover the implied move. The implied move can be found by adding the front month ATM call and the front month ATM put and multiplying by .85. If the implied move is 10% of the stock price, for example, one would want a minimum of that much profit cushion. Ideally, even more. Advanced alternatives: buying put protection or stock replacement strategies via call options.
  6. 50MA Stop – Sell any close below the 50MA or 10WMA that is accompanied by significant volume. Additionally, sell any stock that lingers or trends below the 50MA.
  7. Distribution Selling – Consider selling stocks if market distribution days begin to mount. 4 or 5 distribution days should be a trigger to begin selling any stocks that are not showing a profit or only small gains. Always sell laggards first. Advanced alternative: Hedging.
  8. Climax Run – Sell stocks that climb 25 to 50% in a short burst of 1-2 weeks. There are many variations of climax runs and a good description of each can be found here.
  9. Failed Breakout – An early entry followed by a breakout on below average volume or a strong volume reversal below the pivot within a few days after a breakout can be used as sell signals.
  10. Longer Term Holds – Sell on late stage breakout failure or failure to make progress over 1 full quarter (13 weeks). Rule #6 applies here as well.
  11. Bad Reaction – Sell on a large drop accompanied by huge volume following an earnings report. Additionally, consider selling if forward estimates for annual EPS growth slow considerably.
  12. New Highs, Light Volume – Sell new highs accompanied by light volume. Demand is drying up.
  13. Railroad Tracks – Beware the railroad tracks pattern on the weekly chart. Of this, I speak from experience. When a stock covers nearly the same price range as the week before and also closes little changed, it’s time to exit. More here.
  14. Scared money and/or confused participants should move to cash. If the market action doesn’t make sense to you or you’re scared to lose or anxious to chase, it’s always best to step aside until your head and emotions are settled.
  15. Multiple Losses – Taking multiple losses over a short period of time is usually a sign to take a break. Move to cash, step back, re-evaluate and see where your analysis might be wrong. Perhaps, the general market is in a correction or action is choppy during a consolidation period. Additionally, individual stock selection may be poor. This often happens as rotation is taking place from growth to value or former leadership groups pass the baton to new leadership groups. Stepping out of the market will typically make the picture clearer and allow the position trader to get back in tune with the markets.

This post is meant to be a starting point for new position traders to have a reference for some common selling rules. My hope is this helps to serve as a template for developing a written set of rules of your own. Trade’m well!