When to sell??

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13th Feb '14 by RobbOnTheRock

22 comments 11531 reads

Hello,

As a relatively new investor, I'm looking for tips on when to sell shares and bank a profit......

Having read the Naked Trader he advocates running your winners, and bailing out of loss making trades.

I appreciate the point about preservation of capital, and so I have set my stop loss at between 10 and 15%.

But I'm not really sure when to take profits, so I was hoping some of you guys would be able to give some good rule of thumb advise?

I'm usually aiming for a 20 to 30% gain over my ownership period, so one school of thought would be to sell upon hitting that target!

So, any advice gratefully received.

Cheers
Andy

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RobbOnTheRock

Premium Member

I'm a 30 something Engineer, working in the Oil and Gas industry. I'm married with 2 children and my investing aim is to grow my savings into a pot which could provide an income for me. I am not relying on this to provide a pension, as I have a separate company administered pension. more »

22 comments

AnonymousUser37567

14th Feb '14

Apart from some of the reasons from above I would only sell a share if I had somewhere to use the money. This is basically not selling a share then sitting in cash for the next year unless you are good at reading the market.

DJLJ23

14th Feb '14

Hi Alterego,
Regarding stop losses, i tend not to have a fixxed stop loss, but try to understand if the reduction is due to general market trends or a company specific issue, if its the latter i get out.

RobbOnTheRock

14th Feb '14

Hi,

Thanks for your input folks, lots to ponder!

In the main I agree with the census that you should try to understand why a share I going down prior to selling, however I believe that capital preservation has to be king, and there is always the risk that I have bought at or near the top of a share.

@ Alterego - On stop loses, I really just identify where the resistance / support level is and set my stop just below, so if it does hit a downward trend and is just profit taking I hope it won't trigger my stop. but if its parts of a sustained sell off (perhaps due to smarter investors) I'm able to bail out and retain my capital (which I hope is no more than a 15% loss).

Cheers
Andy

DJLJ23

14th Feb '14

Hi Andy,
If your using automatic stoploss, then beware you could well get taken out by early morning drops in the market. I've been caught out by sharp dropsa and the brokers automatic dealing systems. hence why i don't use them.
good luck David

DJLJ23

14th Feb '14

On the plus side an automatic sell, can do you the odd favour, i once ended up 25%, when the automatic dealing system, sold some shares on a spike that must have lasted all of 15 minutes.

TangoDoc

14th Feb '14

I suppose I only buy a stock if I think I'd rather own it than the money and as it goes up and down, with a modest portfolio to check, I keep asking myself the same question; if I have to park some spare cash, would I buy this stock again? I have never applied a stop loss, perhaps because I avoid the more volatile scenes and I take a long while to research and make up my mind. My biggest gains have been when I had worked hard to become happy to buy into a company, saw it fall and saw that as an opportunity to buy some more, only cheaper. But then, I am a collector and a dividend seeker with the long term aim of preserving the nest egg, not one who has ever believed there were any secrets out there or any way to get rich quickly. Like all other arenas in life, most of my luck arrived after I did huge amounts of work. I have been lucky but not as with the throw of a dice. When I buy, it is usually to hold and grow, not as a spec. Too dull for some, I suspect.

Mechanical Bull

15th Feb '14

Selling just because the share price has gone up 20-30% doesn't make a lot of sense. Seasoned investors increase their wealth by identifying multi-baggers that could go up 200-300% or even more. Whatever your investment approach you need to review your portfolio regularly and decide whether your investment case still stands.

A lot of people use stop losses. I don't. I believe they simply play into the hands of market makers who are known to push prices down to trigger a rash of stop losses and then pile back in at depressed prices. In the face of a falling share price, once again it is a case of deciding whether the investment case still stands. If you think that is does, then buy more if not then by all means sell.

I strongly believe that the most important factor in being a successful investor is to avoid making investment decisions based on share price movements. It is too easy to succumb to emotions of fear and greed. Once this happens you will just get played by the market.

RobbOnTheRock

16th Feb '14

Nswler,

Good points, I agree with letting your winners run, I guess I struggle with identifying the reason for a sudden sell off.

For example, I bought Games Workshop (LON:GAW) at 450ish (before I started taking detailed notes and records) and sold off at November last year for 760. This was a pure fluke, since I had set a trailing stop on the share in July that year on the basis that it had gained a lot over the previous couple of years and I wanted to ensure that I would retain a profit if it all went wrong. If I hadn't done that I wouldn't have had a lot to show for lending the company my money for two years.

So a fluke for me, but to me it started me wondering about when is a good time to sell!

In the main I agree that tree shakes are going to try and knock you out. Personnely my stop loss is set by either percentage or by chart resistance level, this number is what I write down on my trading plan, if it breaks through this then I'm going to bail, quite often if the company is good then the support price should be enough to keep it alive.

Cheers
Andy

PhilHofGrowYourDough

16th Feb '14

I know I'm not as clever as Mr. Market but I also know that on occasion the market may try to shake me out of a position.

I use a Naked Trader style of investing so generally I'm in a value play with a Bull Trend.
I will sell on bad news, plus I use Ichimoku Cloud Charts to help me differentiate between trend reversals (i.e. a bearish trend) and a pull back. The cloud charts highlight where major support occurs and frequently the price bounces off the clouds as they provide both support and resistance. If the price breaks the cloud then it's considered significant.

Examples of how I've used that recently include selling Staffline (LON:STAF). I'd built a position with entry prices of £4.10 & £4.35.

I started to reduce my position on 11th November 2013 as the price dropped below a slow moving average on the chart (this was a weak signal as it occurred above the bullish cloud). I then sold out completely on 22nd November 1013 at £5.70 as the price broke the cloud. (see black arrows on image below)

I'm sure this approach isnt for everyone but I think it works well for a Naked Trader strategy.

Enjoy

Phil

jjis

16th Feb '14

It seems you are trading in which case your "system" should tell you when to sell / cut. If you are investing - I would suggest you should be driven by valuation / newsflow considerations.

I came across this article on selling and thought maybe you might find it of interest. It is by a well regarded value manager, Seth Klarman.

Compound Income?

Murakami

16th Feb '14

Great thread- we've now referenced it in one of our FAQ articles:

http://help.stockopedia.com/knowledgebase/articles/321043

PhilHofGrowYourDough

16th Feb '14

JJIS,

Not sure who you are replying to ... however as I said in my post I believe the market is cleverer than me. So a good value investment that drops in price might induce a buy in a value investor but for me it signals danger.

I'll demonstrate a recent example with £BAKKA whose share price started to slide over the last week.

Lo and behold on the 9th Feb the company announces "Suspicion of a possible pathogenic ISA-virus on a Bakkafrost farming site". That pesky market got me again.

I'm ambivalent about naming my style. The terms "investor" and "trader" are both loaded with judgements and there is a degree of snobbery in this respect. It's as if there is a right way when clearly that's ridiculous.

Value investing totally relies on two factors:

1) your ability to estimate value

2) that you have full sight of the facts (see the BAKKA example above)

I dont think I can satisfy either criteria and I would suggest that most private investors don't either.

My approach is to buy high quality value or growth stocks exhibiting momentum and I sell them when the momentum dries up. Sometimes the timescale is weeks (generally this means things have probably gone bad), usually it's six months plus and in some cases such as Tasty (LON:TAST) it's been years.

I'd also argue that my approach reduces the risk of getting wedded to a stock and an investment thesis, i.e. price decreases, it's even better value so i'll buy some more ... and more ... and more.

Each to their own

Phil

AlanJenkins2

16th Feb '14

Part of the problem is that the more overvalued the market is as a whole,the more likely there is to be an unknown reason for any apparent undervaluation.

jjis

17th Feb '14

Hi Phil,
My comment wasn't directed at you! No it was meant for the original poster Robbie and for general consumption. As you say each to to their own no right or wrong answer, I guess whatever works for each individual as everyone has their own opinion. Here is another post from Seth Klarman about Investing versus speculation and here's what I use if any one is interested.

Compound Income?

jmcmeekin

17th Feb '14

I have different exit strategies depending on my entry strategy.

For the vast majority of stocks I have a target price in mind when I enter the trade. Target price is set on what I believe to be a fair valuation for the company, i.e. I try to buy undervalued. When it hits my target I review and sell or hold. Shares in this category recently have been Optimal Payments (LON:OPAY) in the hope of 500p - coming soon.

For other shares - the tenbaggers - I buy, will have a target in mind, once it hits this price I set a trailing stop loss about 20% below the current price and let the profits go. Recent success includes Quindell (LON:QPP).

I do agree with many of the stop loss comments, however I do feel that one has to know when to walk away from a loss - even if it isn't an automatic stop loss, one should have an worst case scenario exit price in mind.

Hope that helps.

RobbOnTheRock

17th Feb '14

Folks,

Thanks very much for all your comments so far, such a brilliant resource!!

Some brilliant links to articles and kicks off some further study :)

Hope no one minds, but I have a few more questions which I will ask via a separate thread which are not exactly related to this one.

Cheers
AndyR

lightningtiger

17th Feb '14

Selling is always the hardest decision to make. I always use stop-losses. My first share I bought with Stockopedia was STAF early last year. When it hit the stop - loss I sold it. Since then it has recovered OK but it could have carried on going down into further deeper losses. I did make one exception with GLOBO and it still has not recovered sufficiently in spite of it being way undervalued in my book and playing a waiting game.
The next step for me was to look at another share which was QPP and superimpose it with GLOBO. The result of clear comparison made the decision to sell half of GLOBO (could have sold all earlier) and Buy QPP relatively easy to do. I am also holding OPAY @ 447p and rising. Value comes out right in the end.

If you want to bank a proffit take it from one of your losses and let your profits with your other shares run.
Cheers from Lightningtiger

alterego

18th Feb '14

STAF is a good example of why I don't use stop losses. I hold these so and recently when news emerged of alleged mis-selling of insurance to staff the SP dropped sharply from around 550p to about 470p. Although the allegation has not yet been resolved (afaik) it appears it was incorrect and the shares have recovered to over 700p.

Had I simply used a mechanical stop loss, I would have sold out at the bottom and missed the subsequent 230p increase. Instead I used my common sense and made a judgement about the likelihood of the story being true and the potential impact on the business.

I only sell if:
- the business no longer has the potential to prosper as it did when I bought the stock, or
- the sp has risen so much that I hold too much of my portfolio in one stock

Simply selling because of a change in the sp that you cannot find a good reason for is not IMO a reason to sell.

PhilHofGrowYourDough

18th Feb '14

Alterego, you are speaking with the benefit of hindsight. The allegations could have been proved correct and the share price could have tanked further. Had I held on to my shares I would have watched them drop sharply to about 4.20 at its intraday worst, putting me under greater pressure and losing my hard earnt profits. I prefer to act decisively rather than to close my eyes and hope.

Simply selling because of a change in the sp that you cannot find a good reason for is not IMO a reason to sell

What if there is no news and the price drops as per my Bakka example. You're making the assumption that everyone has access to the same information. I know that I don't and I never will.

Good luck with Staf

johnrosier

18th Feb '14

The most important factors are the fundamentals/valuation of a stock but I always use charts to try to help me time my entry and exits.

I try and let things run and not sell just because it has gone up. Mistakes of the last couple of years have included selling Sports Direct, Staffline and Ashtead rather than letting the clear uptrend continue.

When do I sell?

In many ways this is far more difficult than when to buy.

In the majority of cases I sell when the stop loss described below is hit and that is why I am attracted to having a trailing stop loss which moves up as the share price moves up. It means that you will rarely sell at the peak in a share price, (who does?), but will get out once the share price trend may have changed.

I do not automatically sell immediately the stop loss is hit but it acts as a catalyst to reassess the holding: there has to be a very good reason to hold on.

If I am unfortunate enough to hold a stock that issues a profit warning I tend to get out. Humans are generally optimists and management rarely communicate how bad things really are, either because they cannot see how bad it is or because they have an innate optimism that things will get better, or that they can make them better. Things normally get worse before they get better and as the old saying goes "profit warnings are like buses - they come in threes."

I might also sell to reduce the concentration in my portfolio to a particular stock or sector if I feel it has got too high.

I may also sell when the valuation no longer seems attractive and I have a more compelling opportunity in which to invest the proceeds.

When making an investment I always set a stop-loss (on my charts, not an automatic one with my broker!)

My view, learned through bitter experience, is that you are best cutting losses quickly. Conversely you should let your winners run. As Warren Buffet said “cut out your weeds and water your flowers”! All too often we are tempted to do the opposite. We add to our losers as it reinforces our original decision to buy it: “I was right to buy it at 100p so I must be even more right to buy more at 85p, after all it’s cheaper. Oh, and I will fund my purchase by selling some of my holding in another stock which is doing really well!”

I believe that one should sell and move on – it saves a lot of emotional heart ache as well as money. The only stocks I really worry about are the stocks that I hold, after all they are the only ones that can damage my wealth should their share prices collapse. Stocks that are going up that I do not hold are purely “opportunities lost”. In other words, if I cut a holding because it looks like it is going to damage the overall portfolio, I do not beat myself up if it bounces afterwards!

I set my stop loss at the trailing 21 day low in the share price, (the bottom of the Donchian channel). This covers the last month of trading and it seems to me that if the stock is falling through the lowest price it has hit in the previous month and hitting a new low, maybe the trend has changed.

Each day I check if the 21 day trading low has moved up and I move my stop loss to that level - a trailing stop loss.

I often sell some of the holding to start with, reducing my risk and then if the trend change is confirmed I will sell the remainder.

By way of example, I have inserted the chart of easyJet for the two years up to 11th February 2014.

The yellow channel (Donchian Channel) is set at the 21 day closing high and the 21 day closing low. easyJet is a beautiful example as between February 2012 and August 2014, whenever it fell back towards the 21 day closing low it bounced and the uptrend resumed. Should it close below the 21 day closing low, in other words forming a new low, then that is when I have to ask serious questions about whether it is time to sell or at the very least reduce the holding. In this case I reduced the holding, realising some profits in August and November but was not too proud to buy back during December as the share price hit new highs and resumed its uptrend.

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RobbOnTheRock

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