Page 1138 - How to Make Money in Stocks Trilogy

124 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

Important Note About the 20%–25% Rule

The 20%–25% gain is calculated from the stock’s ideal buy point. That may
be different from your own purchase price.
As you’ll see later when we discuss chart patterns, the buying range for a
stock is from the ideal buy point up to 5% above that. So let’s say you bought
4% above the ideal buy point. If the stock then rose 20% above the ideal buy
point, your profit would be 16%.
Below is an example of how to properly apply the 20%–25% sell rule.

Lockheed Martin – 2006 20% gain from ideal buy point Price
(Take gains here even though only up
Weekly Chart 15% from your buy price) 80
Ideal buy point: 64.40 70

60
Cup-with-handle 50
Your purchase price: 67.62 46
(5% above ideal price)
Always base the 20% - 25% sell rule 42
on the ideal buy point, which may Stock never rose 20% above your buy point. 38
differ from your purchase price. You would have given back the bulk of your
profits if you based the 20% – 25% rule on
your purchase price and continued to hold.
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Always buy as close as possible to the ideal buy point. One way to do that is
to set automatic trade triggers to buy stocks right when they break out (see Chapter 4).

I’m emphasizing this because I misunderstood this rule when I was start-
ing out—and it cost me money. I thought I should sell a stock when my gain
was 20%–25%. On more than one occasion, I’d be up 15% or so, just wait-
ing for the stock to hit that 20% benchmark. But it would pull back before
reaching that target, and I’d end up taking a much smaller gain or in some
cases a loss. (Apparently, I had to take some lumps before I took to heart the
idea that you should “never let a decent gain turn into a loss.”)