How do you know when its better to bail out of a trade, or let it go? Back on the evening of 02/20/01 we were looking at the moves we had seen in LOW, a retail stock. It was up about $4 from the purchase price and the question was, do we let it ride and hopefully get some more, or do we sell it out, pocket the 4 dollars and move on? We opted to sell, getting out at 57.75 for a $3.75 point gain.
So why sell? It's not a simple question. The retailers had been doing pretty well and the way the market was, any stock that was moving up stuck out like a sore thumb. We felt that with a nice gain under it already, that eventually the market would start taking swings at the retailers that had been strong and sure enough, by the close, LOW had dropped over $3. So bailing early in the day was the correct move. But how do you know?
Well, naturally you never really know for sure, but like everything in this game, we have to take everything into account. When we are in a market that is making wild point swings, and sentiment is terrible, you can pretty well bet that stocks that have been doing well are ripe targets for a fall. This is what we thought might happen and it worked out that way that time. But there is a point behind this. Often we enter a trade, and it is moving up well for us, but then the entire market seems to run out of gas, and the averages start to fade. Since you don't know if it will be a small pull back, and then a rebound that pushes you higher, or a massive dumping, the safest thing you can do is take your profits. We would much rather see you pick up a dollar here and a dollar there, than hold onto to anything in a market that is ugly.
What if you aren't in a position were you can move quickly, then we have to tell you, you shouldn't be buying anything at all in a market like that. Look at the DOW on 02/21/01, at one point it was looking very healthy, and yet it closed down over 200 points! When we are in that type of volatility, you either have to take "NO" positions, or you have to do a little "daytrading" to keep ahead of things.
So, how do you know when to sell something in a market like that? You start looking at it the minute you are profitable. If you buy something at $59 and at 1PM it's 60.50, you instantly have to start thinking about either taking that $1.50, or at the very least, you have to put in a stop that will get you out with at least a tiny profit. If you take the stance that you are going to simply let it ride, chances are good it will take a hit, and your profit will evaporate, maybe into a loss the next day.
It's only in a rising market, with a fairly positive tone that we can buy something, and "loosely" monitor it. Right now the market is a battle field, and you have to take into account every option that could effect you. We felt LOW was ripe for a fall and it happened. Again $4 dollars in the pocket is worth a lot more than "hopes it will keep going". To sum this up, unless the market is in a positive mood, we are either not going to buy something, or if we do, we are watching it closely even if it means "nickle and diming" our way up. Watch for sector strength that fades off. Watch for averages that reverse on you. Watch for downgrades, and other nasty events. All of them can turn a decent profit into a dumper in minutes. When do we sell? When a good trade starts fading and when a bad trade doesn't work. It may seem "too early" on both cases, but its better to be safe than sorry.
http://clix.to/wallmann
