I have three general Sell Rules that I follow.
My primary sell rule is my downside protection. O’Neil states many times to cut your losses at 7-8%. I hold to the lighter side of this and immediately set a Stop-Loss Order at 7% below the purchase price as soon as I buy a Stock. This forces me to quantify and accept my downside risk.
I learned my second sell rule from IBD Educational Speaker Eddie Ramirez when he gave a talk to a Meetup Group I attend. His rule for profit taking is that when three of the following four things happen it is time to get out:
- The Stock sells off hard in significant volume.
- The Stock gaps down in volume.
- The Stock crashes through its 50-Day Moving Average on volume.
- The Current Outlook changes negatively.
I have found in my experience that when I am sitting on a 10-15% profit, this generally represents a large hit to my paper profits. Most of the stocks I find myself holding are significantly above their 50-Day Moving Averages, so a crash through that average usually takes most of my profit with it.
In an effort to prevent giving back so much profit, I have also been using the Profit Taking Strategy that Gil Moralis and Chris Kacher describe in Trade Like an O’Neil Disciple. They spent a lot of time discussing how a stock acts around the 10-Day Moving Average. The basic idea is that if a stock generally respects its 10-Day Moving Average on the way up, then slices through it on volume, then opens and closes below it the next day, you should get out of the position.
I used this 10-Day Moving Average idea to get out of my $BEAV trade. The jury is still out on whether this was the right call or not, but I did lock down a 13% profit.
O’Neil recommends selling any stock that shows a 20-25% profit so long as you’ve held it for at least 8 weeks. He also specifies that if a stock goes up 20% in 3 weeks then it must be held for at least 8 weeks. I think this generally makes sense, but I don’t necessarily understand how following this would have got you into some of the HUGE winners that O’Neil held for many years. Also, If I own a Stock that is up 19%, should I watch that profit evaporate because it didn’t hit 20? This is why I have been using the three strategies above and not simply shooting for the 20-25% as O’Neil suggests.