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Your Sell Tactics: Responses

The 8% Drop-Stop

Setting a stop loss sell order 8% below your purchase price was by far the most popular SELL tactic sent in by Briefing readers. This was made popular by the book "How to Make Money in Stocks," by William J. O'Neil, the founder of Investor's Business Daily.

The basic tactic is to set the stop loss order immediately upon purchase, to keep losses to a minimum, as expressed by "CB."

I set a STOP LOSS at the 7-8% below purchase price with the purchase. If the price drops, then the stop will be executed with a small loss. Better a small loss than a large loss.

If the stock price rises, this tactic can be adapted to protect the "paper" profits. This approach is particularly useful for investors who fear catastrophic drops, and was sent in by "chknltl."

When buying, enter an initial sell stop at -8%. When you reach 6-8% profit, move the stop to break-even. At 10% move the stop to 3% profit, at 15% move it to 10% profit, at 20% sell half of the position, at 25% move the stop to the 50 day MA [moving average] and hold as long as it is above the 50 [day] MA. If a stock doesn't move far enough in two weeks to hit either the stop or a profit point, sell it and look for one that is moving. Use end of day prices. I have used this plan for several years and as long as I stick to it, I make money. The hardest part is taking those 8% losses.

Part of the appeal of the 8% Drop-Stop approach is the mechanical nature of the decision. It does not involve any emotional turmoil, as a reader who identified himself as "Poor Salesman" describes.

As you say, the sell decision is often much more emotional than the buy decision. I have found that my poor sell decisions (waiting too long) have been robbing me of my gains and deepening my losses. So I've decided to make the sell decision a purely mechanical process using stop-loss orders. This should help me to reduce my risk, avoid the emotional turmoil, and focus my attention on the buy decision. I set a stop loss order at 3% down every time I buy, and I track the stock up if it rises. I've only made this change recently, so it is too early to know if it is helping my returns, but it certainly is helping my peace of mind!! -PoorSalesman

However, not everyone embraces the 8% drop-stop concept. It is  particularly difficult to embrace if you really want to own a stock for the long-term. What the 8% Drop-Stop tactic means for a long term investor is that you must place your buy within 8% of the stock's all time low. If you repeatedly try to catch the stock near this point, the losses and commissions can be expensive, particularly if the size of your investment is small. This was aptly expressed by "Jeremy M."

When I first started trading, I didn't know too much, so I followed William O'Neil's (IBD) advice and sold when the stock dropped 8%. However, now, especially in the technology sectors, this is a sure way to dig yourself a bottomless pit. Some stocks, for example TLGD, go up and down in big jumps, if you sold each time there was an 8% dip, you would kill yourself in commissions.

Tollgrade Communications (TLGD) was up more than 12 times this particular year. The 8% Drop-Stop tactic would have kicked many investors out along the way, if they bought at the wrong (short-term) time.

The Form

Some Briefing.com readers have remarkably disciplined approaches to selling. "Dawntrader" sent in her description of the "form" she uses, before making a purchase.

Prior to each and every trade that I make, I fill out a form that I compiled in which I detail my plan, why I am entering (based on support, resistance, group strength) etc. I also determine what my intent with the trade is, short-term, 1-2 days, or longer term based on the current market atmosphere. Recently, my trades have all been entered into under the premise of a short-term hold. When the market establishes itself into a trend, either one way or the other, my time frame will reflect this. Prior to pulling the plug I review the following questions:

• What is the tone of the generic tech market? What is the 5 day simple moving average of Advancing volume/declining volume doing?
• What group/sector is this stock in and what is its chart doing?
• What is happening with volume, up on up days, down on down days? Or is volume flooding into this stock?
• Are any trendlines or moving averages providing support?

When entering a trade my stops are placed either at a trendline or a moving average.

This approach is highly recommended. Not only does it require you to have a premise prior to the purchase, it prevents you from making up reasons to keep holding when a stock declines. All too often investors are reluctant to take a loss, and then invent a whole new premise for keeping a stock. By writing down your initial premise, when buying, you have a metric for progress towards the goal, other than price alone.

Consulting the Index

Another popular technique for making a SELL decision is to compare the stock's performance to the overall market indices, as described by "Georgia F."

For "stalled" stocks I sell if the five-week performance is worse than either the SPX (S&P500) or the NDX (Nasdaq), whichever is outperforming. I revise the stops at least once a week. Often these stops are 10-12% below the current stock price. I also use a daily total plot of my total equity (cash + stock) which I look at from a technical analysis perspective in relation to the NDX which I use as a benchmark index. For instance, the parabolic rise early in the year signaled me to tighten up stops.

The Growth Formula

Many Briefing.com readers are investing for growth. Because of this, they focus only on stocks with high growth potential. This makes the sell decision heavily dependent on future earnings growth. For "Tom C. from Mountain View" this means comparing the current price performance to the earnings forecast growth.

• If the stock's performance over 12 months has been a negative percentage of approximately 30% and the next year's earnings forecast is less than 10%, then I will sell this stock.
• If the stock's performance over 12 months has a positive percentage of approximately 30% and the next year's earnings forecast is less than 10%, then I will sell this stock.

Consulting the Guru

Finally, some of us are fortunate to have a personal guru to consult when pondering the sell decision, as "Brent from West Virginia" told us.

I sell when Sherry tells me to, she knows a lot.

If only we could all be as fortunate.

Robert V. Green