There are many ways to decide whether you should buy some stock or not. But how to know when to sell stocks for profit or loss?
If you are a long-term investor and your goal is to make money investing in stocks, you have to make two very important decisions. The first one is to buy the stock at the right time. The second decision you have to make is to sell a stock in order to make money or sell it and accept the loss. People are usually focused on buying stocks, but selling them at the right time is also very important.
Sell your stocks when fundamentals negatively change
If the company experienced a significant drop in Sales, Net Income, or Operating Cash Flow, this can indicate the company’s competitive advantage is failing and the competition is selling a better product or service for a lower price. It can also indicate that the competing companies have much better management.
If you want to check out the news and see what’s going on with the company, you can use FinViz to see the latest news from multiple websites:
I keep track of all my investments in a spreadsheet. I also have my own rating system (investment scorecard). If the score in my spreadsheet changes significantly, I usually look for reasons why the fundamentals changed, and then I decide if I should sell stocks for profit/loss or keep them.
Here’s what my investment scorecard looks like:
Sell when a company loses its competitive advantages
This is usually related to the previous reason to sell stocks, but not always. There are a lot of additional reasons that can lead to a decline in sales: there has been an unexpected change in the market environment, the company cannot compete with other companies in the same industry, or the company is failing to serve its customers.
Sell when a company cuts the dividend without any logical reason
When a company does that, it can be a sign that it doesn’t have enough free cash to pay the dividend. Maybe the management decided to re-invest this cash in order to increase sales in the future. In this case, you shouldn’t consider selling your stocks.
Sell when the price rises dramatically
If you see a fast and unexpected rise in the stock price, this doesn’t mean that you are smarter than 99,9% of investors in the world. When you start thinking that you are smarter than the overall market, you will usually become greedy, and this is not something you want to happen. On the other hand, if the stock price drops really fast, and you are sure that the company is really good, make sure that you buy more shares.
You need money for much better investments
As a serious investor, you should always keep 10-20% of your total equity in cash, and use it when you find attractive investment opportunities. But in some situations, you will simply not have enough cash to invest. In this case, you should consider selling the stocks that don’t perform well and buy other stocks which could perform better in the future.
Sell when the price hits your target
If you are a value investor, you should already have a predetermined price target. For example, if the current stock price is $100 and your estimated fair value is $150, set an alert when the price reaches $145, and take a closer look at the company at that particular moment. Think about what could happen in the following days…
Using technical analysis to sell your stocks (SMA crossover signal or Keltner Channel overextended)
I don’t use technical analysis to decide if I should buy/sell some stock or not, but I use it to find the best entry (and exit) points. There are two ways to use technical analysis to decide when to sell stocks.
The first one is called “moving average crossover”. For example, when SMA 50 (simple moving average is above SMA 200, this means that the stock is in an uptrend. When SMA 50 crosses below the SMA 200, this would be your selling signal:
I personally don’t prefer using the SMA crossover because it gives the signal too late.
A much better approach is using the Keltner Channel indicator. As you can see in the next picture, the price is inside the Keltner Channel more than 95% of the time. If the price is outside the Keltner Channel, this means that it is overextended (overbought) and you should consider selling your investment:
You can do the same thing using the RSI indicator. If it’s above 70, this means that your investment is overbought:
You can use the same technique to buy stocks. Look at how MGM stock was oversold a few months ago:
Selling your favorite stocks is not always easy, but sometimes it has to be done. I hope that this post will give you an answer on how to know when to sell stocks…for profit or loss.