The three types of selling

Whenever you plan to buy a stock, ask yourself whether you plan to own it for the rest of your life and leave it to your heirs. Since the most likely answer is “no,” the next question must be: What will prompt you to sell this stock?

Obviously, you buy because you expect the stock to rise. How highdoes it need to fly for you to say “Enough!” and sell it? Do you have a specific price target or a range of targets where you will seriously consider selling? Is there a price or indicator pattern that will tell you the up-trend is at its end and it is time to take profits? Needless to say, the best time to answer such questions is before you enter a trade.

What if you are wrong about the rally, and the stock slides instead of rises? How low does it have to fall for you to pull the trigger and shoot the puppy? The worst time to make such decisions is when you own the falling stock. As it keeps sliding lower and lower, there will be signs of the stock being oversold, of the decline being at its end and about to reverse. If you are unwilling to take a loss, you can delude yourself for a long time and suffer serious damage. The best time to make a decision on when to get rid of a stock is before you buy it.

Finally, you may decide to sell if a stock does not move within a specified period of time or if it traces a suspicious price or indicator pattern. What does this stock have to do to challenge your bullish outlook? I call this type of selling “acting in response to engine noise.” As you become more experienced, your ears will become more attuned to such noises. In summary, you can divide selling choices into three main categories:

1. Sell at a profit target above the market.
2. Be prepared to sell below the market, using a protective stop.
3. Sell before the stock hits a target or a stop—because market conditions have changed and you no longer want to hold it.

Let us now review these choices one at a time. Remember, trading is a huge field, and no one can master every method. It pays to be aware of many methods. You will need to select what appeals to you and train yourself to become good at it.

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