Monday, January 17, 2011

When do I sell?

Have you ever watched a sizable gain melt away as you struggled over the decision - should I sell?  It is better to take the emotion out of that decision.  I have shown you how channels, CCI and cycle tops can indicate a sell.  Still you have to pull the trigger.

So maybe it would be better to have a way to set automatic sells using trailing stop orders.  Problem with that is you have to make a judgment as to how tight to set stops.  On an average beta (average volatility) stock that may be 5% or so below current price. On a stock the has a higher beta (more volatile) that may be 8-10% below the current price.  You don't want to get taken out just as the stock is ready to start a run. 

What if we set looser stops until a top is on the horizon?  Then we tighten our stops so as to keep most of our profits.  Is there a way to do that?  To keep going up a stock needs to attract more buying.  More buying implies more money flowing into the stock.  But since stocks normally overshoot money flow into a stock may actually top and head down before a stock tops.  And we want that up move generated by that overshoot in price.

So when we detect a pullback in the money flow into a stock we don't sell we tighten our trailing stops.  Say if we had them at 5% we might tighten them to 2.5-3%, or if we had them set at 10% we may tighten them to 5%.  This way we continue (hopefully) to ride the trend and the market will make the sell decision for us and never again will we ride a winner down.

I have charted and annotated the chart for you using SPY as my example with the MFI (Money Flow Indicator).  Here is the chart:
GL traders.  It is not to late to make a New Year's Resolution to never again ride a winner down because emotionally you can not decide.  Let the market decide for you.

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