Page 1129 - How to Make Money in Stocks Trilogy

Selling Checklist 115

But if you have a nice gain of, say, 15%, 20% or better, and the stock
begins to trend down, don’t let that profit disappear completely.
Look for warning signs like those in the “Defensive Selling” section of
the checklist. If institutional investors are clearly starting to sell, you’ll
want to lock in at least some of your profits. And if the general market
uptrend is also starting to run out of steam, that’s all the more reason to
cash in the gains you have left.
If you choose to hold, have a target sell price in mind. For example, if
your former 20% gain falls to, say, 10%, sell. The profit-taking price is up
to you. The point is, you never want to “round-trip” a stock by riding it
up to a big gain and all the way back down into a loss.
Believe me, it’s much less frustrating to see a 15%–20% gain turn into
a 5%–10% profit than it is to see it turn into a 5% loss. Don’t forget: You
can always buy back the stock if it rebounds and institutional investors
start aggressively buying it again.

Use Trade Triggers to Protect Your Profits
You can set trailing stop-loss orders and other trade triggers with your broker
to make sure a good gain doesn’t slip into a loss (Chapter 4).

5. Don’t marry your stocks. Just date them!
“For better or for worse, for richer or for poorer” is a noble and time-
honored approach to marital fealty, but it’s a bad idea when it comes to
investing. In most cases, it’s better to take a good gain while you have it,
then move on to your next conquest. And never hesitate to cut yourself
loose from a bad relationship if there are clear signs of trouble.
(Remember: Don’t try this at home with your significant other . . .)
6. Sell your losing stocks first.
If you were trying to build a champion baseball team, would you trade
away your top players and keep all your benchwarmers? Of course not!
Yet many investors do just that: They sell stocks in which they have a
good gain—and hold on to those showing a loss, thinking a big gain is just
around the corner. That’s usually wishful thinking. To build a power-
house portfolio, you want to do the exact opposite: Sell your losers and
use that money to add new winners to your roster or invest more in the
top performers you already own.