Page 396 - How to Make Money in Stocks Trilogy

When to Sell and Take Your Worthwhile Profits 271

lying could have been sold earlier, and the money moved into other stocks
that were breaking out of sound bases with top fundamentals.
When your hard-earned money is on the line, it’s more important than
ever to pay attention to the general market and check IBD’s “The Big Pic-
ture” column, which analyzes the market averages. In both the 2000 top and
the top in the 2007–2008 market, “The Big Picture” column and our sell
rules got many subscribers out of the market and helped them dodge dev-
astating declines.
If you make new purchases when the market averages are under distrib-
ution, topping, and starting to reverse direction, you’ll have trouble holding
the stocks you’ve bought. (Most breakouts will fail, and most stocks will go
down, so stay in phase with the general market. Don’t argue with a declin-
ing market.)
After a new purchase, draw a defensive sell line in red on a daily or
weekly graph at the precise price level at which you will sell and cut your
loss (8% or less below your buy point). In the first one to two years of a new
bull market, you may want to give stocks this much room on the downside
and hold them until the price touches the sell line before selling.
In some instances, the sell line may be raised but kept below the low of
the first normal correction after your initial purchase. If you raise your loss-
cutting sell point, don’t move it up too close to the current price. This will
keep you from being shaken out during any normal weakness.
You definitely shouldn’t continue to follow a stock up by raising stop-loss
orders because you will be forced out near the low of an inevitable, natural
correction. Once your stock is 15% or more above your purchase price, you
can begin to concentrate on the price where or under what rules you will sell
it on the way up to nail down your profit.
Any stock that rises close to 20% should never be allowed to drop back
into the loss column. If you buy a stock at $50 and it shoots up to $60
(+20%) or more, even if you don’t take the profit when you have it, there’s
no intelligent reason to ever let the stock drop all the way back to $50 or
below and create a loss. You may feel embarrassed, ridiculous, and not too
bright if you buy at $50, watch the stock hit $60, and then sell at $50 to $51.
But you’ve already made the mistake of not taking your profit. Now avoid
making a second mistake by letting it develop into a loss. Remember, one
important objective is to keep all your losses as small as possible.
Also, major advances require time to complete. Don’t take profits during
the first eight weeks of a move unless the stock gets into serious trouble or
is having a two- or three-week “climax” run-up on a stock split in a late-stage
base. Stocks that show a 20% profit in less than eight weeks should be held
through the eight weeks unless they are of poor quality without institutional