The Importance of Sell Rules
Sell on the way up. Minimize your losses.
Having a plan is important. Without it, greed or fear can set in.
When we are up huge, we refuse to sell. The stock price might come back down to where we bought it or even below. What could have been a gain turned into a loss. In this scenario, greed got the best of us.
When we are down, we refuse to sell. We start to think that the price will eventually go up. Next thing we know, the stock is down 50% to 75% when we could have sold at a 10% loss. In this scenario, fear got the best of us.
If we can plan our entries, we can also plan our exit.
Have An Exit Strategy For Losses
When we buy a stock, we should decide how much we are willing to lose. Here are some ideas:
Lose no more than a set percentage of the entry price. We sell when the price drops 8% from the entry price. For example, if we bought a stock at $100 per share, we will sell it when the price drops to $92 per share.
Lose no more than a percentage of our portfolio. For example, we have a $100,000 portfolio. We do not want to lose more than 1% or $1,000. We have $10,000 available to buy stock. This means we choose not to lose more than $1,000 loss (or 10%) of a $10,000 stock purchase.
The percentages will depend on your risk tolerance. For many investors, they set their losses to 5%, 8%, or 10%.
We want to use stop-loss sells. When we buy, we place a stop-loss order to sell at the lowest price. This way, we avoid letting emotions get the best of us.
When the stock has reached a certain amount of gain, it is good to move the stop loss order to a price above the entry price. For example, set the sell price to $101 for an entry price of $100.
Have An Exit Strategy for Gains
When we buy a stock, we should decide how to lock in gains.
Why should we set a specific price? Isn’t it better to hold it as long as you can?
Many times, I have seen a stock go up to 10% and sell off hard back to the entry price and below. If you sell on the way up, at least you lock in gains. In this scenario, you will have had a 4.5% gain when the stock price dropped like a rock.
Another reason to sell on the way up is to build mental capital. Selling at a gain feels great! Every time you sell with a profit will help build confidence.
By selling at a set price, we can be proud that we achieved our goals.
The PIMM Trading Strategy
We use these rules to help minimize our losses and lock in gains on the way up.
When we buy: When we buy, set the stop loss order to 10% below the entry price or a value we calculate using our proprietary system. We choose the value that has the least loss. For example, we would sell at $90 for a $100 per share entry price.
The price is at a 2.5% gain: We sell 10% of our stock shares.
The price is at a 5% gain: We sell another 10% of our stock shares. We move the stop-loss order to 1% above the entry price. For example, we would sell at $101 for a $100 per share entry price.
The price is at a 7.5% gain: We sell another 10% of our stock shares.
The price is at a 10% gain: We move the stop loss order to 5% above the entry price. For example, we would sell at $105 for a $100 per share entry price.
The price is at a 20% gain: We move the stop loss order to 10% above the entry price. For example, we would sell at $110 for a $100 per share entry price.
So forth and so on: We keep moving up the stop loss order in increments of 5% as the price moves up. We sell the remaining 70% of shares if we can see the price has peaked or the stop loss order has triggered.
If you can lose less than the market, you are outperforming it. If you can sell close to the peak price, you will be elated.
Before You Go
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Disclaimer: The author of this post is not a financial advisor. The information provided herein is not financial advice and should not be construed as such. This content is intended solely for educational purposes and should not be used as a basis for any financial decision-making.