Page 732 - How to Make Money in Stocks Trilogy

34 HOW TO MAKE MONEY IN STOCKS SUCCESS STORIES

In How to Make Money in Stocks, Bill O’Neil says, “You have to realize
when you may be wrong and sell a stock without hesitation. How do you
know if you’re wrong? The price of the stock will drop below what you paid
for it!”
The cardinal rule in CAN SLIM Investing is to cut all losses at no more
than 7 to 8% below the price you paid for a stock. Preservation of capital is
the most critical part of investing.
That means if you paid $30 for a stock, you would sell if the stock dropped
to $27.60, 8% below your purchase price. But you don’t have to wait till a
stock is down 8% from where you bought it. A trade that is going against you
can be sold with a smaller loss, say, 4 to 5% below what you paid for it. The
point is to keep your losses as small as possible.
Steep losses require big gains just to break even.

• A 25% loss requires 33% gain to break even.
• A 33% loss requires 50% gain to break even.

• A 50% loss requires 100% gain to break even.

“He who hesitates, meditates in a horizontal position.”

—SENSEI ED PARKER

Selling a losing position must become automatic. You cannot hesitate.
Consider trade triggers through your brokerage account if you have trouble
with selling. That way, you’ve put in a predetermined sell price. This will
help keep your emotions under control and keep you from freezing at a crit-
ical moment.

Simple Sell Rules
Take most profits at 20 to 25% unless a stock runs up 20% in 2 to 3 weeks,
and then it must be held after its breakout for eight weeks. IBD studies
show that some of the market’s biggest leaders will have a sharp advance
before heading even higher, so holding onto these potential big winners is
important.
The reason most stocks are sold at 20 to 25% gains is because many stocks
will slow down, consolidate their gains, and build another base at that point.