It's a great feeling when a stock pick works out in your favor. But you don't want to fumble the ball at the one-yard line. You want to make sure you score the touchdown and collect all the profits associated with the win.
Today, we're talking about how to scale out of a position that's worked in your favor, in a way you can successfully capture the gains you've made in the stock. You must have definite sell rules you can use even when things are going great and a stock moves perfectly in your favor.
There are at least three cases where you should strongly consider selling a portion of your position after the stock goes on a big run from your initial buy point. Those three points are:
- At the 20% to 25% profit zone
- 10% to 15% extended above the 10-day moving average
- At a break of the 10-day or 21-day moving averages
Sell Rule No. 1: At The 20% To 25% Profit Zone
After a 20% run, you might wonder if the stock could gain 50% or 100%. And if it is not sending any sell signals, like a break below the 50-day line, why wouldn't you hold?
It may seem a little counterintuitive at first. But experience will quickly teach you that the 20%-to-25% level is often the perfect point to lock in some of your profit and eliminate the risk that a 20% gain could fade away to zero.
It's a good rule to stick by to ensure you lock in at least some of your gains. You don't have to sell the entire position. Perhaps consider selling a quarter size or even just 20% of the position.
Sell Rule No. 2: 10% To 15% Above 10-Day Line
When a stock is on a powerful run, you'll see it become extended above not just the 50-day and 21-day exponential moving averages, but also the 10-day line as well.
Once a stock becomes anywhere from 10% to 15% extended above the 10-day line, that's often a good place to sell another quarter or 20% of your position.
Sell Rule No. 3: A Break Of 10-Day Or 21-Day Line
Now usually, after a stock has run up and become extended from the 10-day line, it makes sense for a pullback to occur. Nothing goes up forever.
Investors can use the 21-day moving average as a line in the sand as well. If the stock undercuts either of these, it may be a good time to sell your remaining shares.
By this time, you may still own some shares. But if the stock falls clearly below the 50-day moving average (or 10-week in the weekly chart), that's the time to sell any remaining shares. If the break of the line comes in heavy volume, that's even more reason to sell.
A break of these lines tells you institutional investors are no longer supporting the stock on a dip. You'd be selling below the stock's peak, but you'll avoid larger losses.
