How do you tell if a stock is at the end of a major price advance? In this lesson,
you'll learn about ways to recognize when a stock starts sputtering and lock in
your profits. Chart-reading skills are a key part of this education.
When To Take A Profit
Let's say you bought a stock and you're watching it go up. At what point do you
call it a day and take your profits?
The sell signals discussed here and in other lessons can occur well before a stock
has peaked. So it's important to learn to recognize critical sell signals. If you
regularly review the characteristics of stocks that took a turn for the worse, over
time you'll be able to quickly spot valid signals as soon as they occur.
There are several simple selling strategies that have proven beneficial in helping
you consistently lock in profits.
Here's a simple one. Generally, stocks tend to move up roughly 25% to 30% after
rising out of a base. Then they may go through a period of consolidation, when a
stock seems to go nowhere for a number of weeks.
A strategy that safeguards your profits is to sell after you've captured a 25% gain.
This is the conservative approach to profit-taking that works like "building blocks."
Once you sell and take a 30% gain, compounding it with other 25% profits taken during
the year should net you very substantial gains overall. This gets back to one of
the basic tenets of investing: The key to being really successful is to capitalize
on your strongest stocks.
The 25% profits will also outweigh any mistakes you make in stocks that start to
take a nosedive if you also cut losses at 8% (see Lesson 1, "When To Sell Stocks
To Cut Losses.") These two strategies alone could help you become quite successful
in the market.
There's an exception to this rule, however. If a stock races up 20% in one to three
weeks out of a proper base, it probably means it has plenty of fuel left and you
should hang on to it. It may be your best stock. And always review the market conditions.
In a strong market, you will see this situation often.
The shorter the trip to the 25% level, the stronger the stock.