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Do you know when to exit a stock? Top 5 sell rules one must follow to increase profits

William O’Neil, the founder of Investor’s Business Daily, studied past runners and discovered that successful stocks, after breaking out of a proper base, tend to move up 20-25%.

December 29, 2018 / 01:01 PM IST

Vipin Khare

If you don’t sell early, you will be late. Your objective is to make and take significant gains. Do not get excited, optimistic, greedy, or emotionally carried away as your stock touches new highs or gains more than what you anticipated at the beginning of the trade.

The basic objective is to make net profits. To retain worthwhile profits, you must sell and book profits. The key is knowing when to do just that.

To be successful in the stock market, it is important to have definite buy and sell rules.

William O’Neil, the founder of Investor’s Business Daily, studied past runners and discovered that successful stocks, after breaking out of a proper base, tend to move up 20-25%. Then they usually decline or move sideways to form a new base, and in some cases may resume their advances.

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From this observation, he came up with the rule of selling stocks when they gain 20-25% with an exception that if the stock gains 20 percent within three weeks of breakout, then it must be held for at least eight weeks.

Graphite India 1

The stock has risen more than 20 percent from the Pivot buy point within the first three weeks of the breakout on two occasions as depicted in the above chart.

If one had sold it after a 20-25 percent gain, they would have lost a big opportunity as the stock rallied 780 percent in the next 52-weeks (January 2017 to January 2018) after its first breakout point.

8% strict sell rule:

After an extensive study of the past stock movements, it was observed that winning stocks do not drop more than 8 percent from its Pivot buy point.

In fact, most big winners don’t close below their pivot point. Stocks losing 8 percent from the Pivot buy point is to be sold strictly as it indicates a failed breakout.

The following are some of the key technical sell signs:

Rule 1: New highs on low volume:

Some stocks will make new highs on lower volume (less than average volume). This suggests that big (institutional) investors have lost their appetite for the stock.

Rule 2: Closing near day’s low:

If a stock closes near its day’s low on several days, then it is an indication that the stock has reached its peak.

Rule 3: 200-day moving average line:

Some stocks may be sold when they are 70-100 percent above their 200-day moving average price line. This indicates that the stock is extended too much and decline may happen.

Rule 4: Increase in consecutive down days:

For most stocks, the number of consecutive down days in price relative to up days in price will increase when the stock starts down from its top. You may see four or five days down, followed by two or three days up, whereas you would have seen four days up and then one or two days down.

Rule 5: Poor Relative Strength Index:

A declining relative strength line indicates technical weakness. Declining RS line can be used to sell your stocks. According to our methodology, we look for stocks with an RS Rating of more than 70.

There are many signals to look for when you are trying to recognize if the stock has reached a climax top and is about to go down. The above mentioned are some of these factors.

(The author is Director- Research, William O'Neil India.)

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are his own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Vipin Khare is the Director- Research at William O'Neil India.
first published: Dec 29, 2018 11:11 am

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