Take profits when a stock exceeds 20% to 25% gain; Exxon is a good example
When is the right time to sell stocks? Many new investors make the mistake of not selling when a stock is rising. In fact, taking profits on the upside is a smart move, which preserves wealth and reduces the risk of the stock falling.
You don’t need to hit home runs to win the investment game. Focus on getting basic hits. Although contrary to human nature, the best way to sell a stock is often while it is making progress and looking strong to everyone. To grow your portfolio significantly, realize most gains when the stock rises 20% to 25% from its last buying point.
As IBD founder William J. O’Neil says, “The secret is to get off the elevator on one of the floors on the way up and not come back down.”
So after a significant lead of 20% to 25%, sell hard. This way, you won’t get caught up in heartbreaking 20-40% corrections that can hit market leaders.
The 20% to 25% take profit rule
IBD has long encouraged investors to limit their risk in every transaction. Cut the losses of each investment when it reaches the sell rule from 7% to 8% and move on to the next trade. The golden rule of selling is as simple as that.
When a headline is heading in the right direction, your decision making isn’t as easy. If market conditions are choppy and decent gains are hard to come by, then you can exit the entire position.
But if the market winds are favorable and your stock still seems to be in the early stages of its run, then go ahead and sell at least part of the position, like a third or a half, to lock in the gains. Keep watching the behavior of the stock to decide how to handle the rest.
The exception to this sales rule? When a stock goes up 20% within three weeks of leaving a strong base and the market is doing well, try to hold it for at least eight weeks. These rapid rises in breakouts could be big winners in the long run, so they deserve some leeway.
Take profits on the rise
It was a good year for Exxon Mobil (XOM). It came out of a cup base on January 5 after a buy point of 66.48 (1). As of Feb. 1, it was up 20% from that entry as the company reported fourth-quarter earnings that beat Wall Street analysts’ estimates. (2).
Should investors have sold the stock on Feb. 1 when the stock hit a short-term high of 81.51? Our portfolio management rule says yes, at least some stocks.
Over the next few weeks, the stock plunged for a few weeks. Investors would have been comfortable selling at least some of their Exxon Mobil stock on Feb. 1.
Then Russia attacked Ukraine, sending oil prices skyrocketing and taking oil stocks with them. Another sell opportunity to take profit? Probably, at least for investors who missed the previous opportunity to sell stocks.
After peaking on March 8, Exxon shares consolidated for many weeks in what would become a cup-and-handle base with a buy point of 89.90. (3). It crossed this buy point on May 4th. XOM never quite hit the 20% profit target thereafter. The title began to fade as oil prices fell.
Once again, however, XOM stock is cupping with a handle and attempting to return to a buy point of 101.66.
Benefits of taking profits
Not all of your stocks will be huge winners like Exxon in 2022. Most stocks you buy in a bull market will be profitable, but not among the best of the decade. With profit taking, you can lose twice and win once and still be ahead.
And taking a profit feels good. This builds confidence when you transfer money into the realized capital gains column of your brokerage account. Additionally, that money could be applied to another rising stock that is even stronger than the one you just sold.
Finally, you can always buy back a stock if it has another valid buy point.
Follow Michael Molinski on Twitter @IMmolinski
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