When to sell stocks? IBD's investing rules, judged by the American Association of Individual Investors as one of the most powerful among more than 40 different investing strategies, advocatetaking most profits at 20% to 25% and cutting losses at 7% to 8%.
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These are not just numbers pulled out of thin air.
IBD research of the biggest stock market winners shows that when a stock breaks out and gains 20% to 25% or so, it's a great time to sell. Why? Such a stock often takes a break before moving up again. The decline may usher a pullback to the 50-day moving average, or it is a more drawn-outcorrection that results ina whole new base.
Most stocks that go on to big moves also don't fallmore than 7%-8% below their buy point soon after the breakout.
Byemploying these rules rigidly, you will target your profit-to-loss ratio at roughly 3-to-1.
That means you can have three losers for every one winner and still not get hurt. If you can improve your stock picking, or be disciplined in your stock market timing so that you invest only in periods that are more favorable to stocks, you can come out way ahead, even with more losing trades than winners.
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Plus, if you get an outsize gain every now and then, and you use the eight-week hold rule, you can materially improve your resultsover time.
With the 3-to-1 profit-to-loss ratio, it's easy to adapt in different market environments. Consider it your Swiss army knife for investing.
When To Sell Stocks: Sometimes Do This
In a choppier market, you may find that stocks aren't making gains of 20% to 25%. Rather, you are lucky to get 10%, 12% or 15%. No problem. Adjust your profits down to those levels if that's all the market is willing to give.The market and your portfolio provide valuable feedback on when these adjustments need to be made.
So when lowering expectations for profit, also reduce yourmaximum loss to keep the 3-to-1 ratio. If taking gains at 10% to 15%, cut losses at 3% to 5% from your purchase price. It maybe less exciting than a home run, but a lot of singles can still bring in runs. Go to an IBD-hosted event, and you might hear speakers refer to the concept as playing "small ball."
Even whenmarkets don't seem to give much on the upside or downside, the 3-to-1 profit/loss ratio can be used in a swing trading approach. The biggest profits will gravitate around 10% or less. Minimize your losses to around 3%.
The time frame of your investing will also change with this approach. Consolidations can be shorter than the typical five- to eight-week requirements and shorter-term moving averages will be used.
Know when to step aside completely. A range-bound sideways market — or daily action that swings up and down — are damaging to your portfolio and psyche. IBD's SwingTrader, a premium new product, issues alerts to subscribers when the market heads into such chop.
A version of this story was last published on Sept. 23, 2016. Follow Nielsen on Twitter at @IBD_JNielsen for more on growth stocks, portfolio management and swing trading.
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