How to tell when its Time to Sell your Stock

Trading in the stock market can be very lucrative, but it is very challenging as well. One of the most common dilemmas that traders face is when to sell a stock. It is always important to enter a trade with both entry and exit strategies. A very common mistake that traders make is to prepare good plans for buying a stock, but fail to create points to sell their positions.

If you are to buy a stock, make sure you know when to sell it. It’s just like getting inside an establishment, you should know the exits. Normally, if you don’t have any exit plans, your emotions will cloud your logic, hence either making you greedy or fearful. If the stock that you bought continuously rises, greed sets in and you no longer want to sell it. The result? Instead of realizing gains, it will go back down either cutting your profit, breaking even, or even losing money.

On the other hand, if the stock that you bought goes lower, you either do two things; one is to cut your losses quickly  because you panicked, or hold on to your stock and hope for it to go back up. The first one inflicts a lot of damage because if you exit your position on a loss, you definitely realize a loss.

So the question now is, how could you set your selling points? Here are some tips.

1. Buy stocks that are bound to go up. Stocks that are bound to go up are stocks that either have good chart patterns, good fundamentals, or good sentiment. Normally, it’s a combination or the presence of the three. Irregardless of volatility, good stocks will always go up in time, hence you will be more confident with your position. Learn technical analysis and plot points wherein the price is expected to reverse. Then to ensure gains, sell when the price gets near that point (resistance). If the price hits the resistance and goes back down, wait for it to lower and buy again. However, if the stock price breaks past the resistance and continues to go higher, buy it back and set another selling point on top, probably on the next resistance level.

2. Sell when market sentiment weakens. Sentiment means how people look and approach the market. In strong markets, prices go up because people are buying, hence increasing the demand. In weak markets, selling persists and pulls prices down. In a weak market, prices are expected to drop, hence if you are gaining, lock in your profits and wait for a better buying opportunity. If your stocks are at valued at a loss, stomach your losses by selling it and wait for a better buying opportunity. A better buying opportunity is when the market regains a new strength and share prices continue to go back up.

3. Sell when the stock rises over its intrinsic value. The market value of stocks is either below or above their intrinsic value or their true value. If the stock price is below its intrinsic value, it is considered undervalued, but if the stock price is above its intrinsic value, it is considered overvalued. There are many ways to compute and see a certain stock’s intrinsic value. A very easy way is to check its price to earnings or P/E ratio if it is above or below its sector’s average P/E ratio. Any P/E ratio that is below the average P/E ratios of the said sector believed to be undervalued, and anything over is said to be overvalued. Closely monitor the P/E ratio, and if it increases above the sector average, sell it. Sooner or later, its price will go back down.