FEEDWall Street has many great sayings. One that I try to live by is “let your winners run and sell your losers quickly.” Many people buy into the “letting your winners run” part, because they have also bought in to Wall Street’s buy and hold philosophy. However, unless you are planning on “letting your winners run” until retirement – you will need to sell at some point. So when do you sell. In particularly, when do you sell a winner? Let’s take a closer look.
If you really think about it - you have two options for selling a stock: selling as it is rising (into strength) or selling as it falling (into weakness). To accomplish yet another famous Wall Street saying, buy low and sell high, by definition - one must sell into strength.
Selling into strength is a proactive trading strategy. It requires selling when a stock is still rising but is expected to reverse. The problem is trying to determine if a stock is preparing to reverse or if it is simply pausing on its way higher. This is a critical decision point.
I believe that if your desire is to let your winners run – the stock must be given the benefit of the doubt until it proves that it is no longer rising. Thus, letting you winners run and selling into strength are mutually exclusive. In other words, selling into weakness is a consequence of letting your winners run.
Some of my subscribers were disappointed a few weeks ago when we watched a great deal of our profits in DBA slipped away. That is simply a result of the philosophy. I have accepted that with this style - I will not sell at the highest point.
Although, I sell my winners slowly – I sell my losers quickly. Stocks often forget which way is up. Usually, the first day is no big deal. On the second or third day, most will start getting a little edgy. By the fourth day, this joke is no longer funny. If something unforeseen happens and stock is whacked hard – panic sets in.
In the above scenario, anxiety increases each day as the stock declines. Anyone that has placed more than a couple of trades has faced this emotional battle. Experienced investors understand that controlling their emotions is critical to their success. Cutting losses quickly prevents emotions from clouding your judgment.
The math of large losses also works against a losing position. A stock that falls 20% requires a 25% gain to break-even, not 20% as many think (20 * .8 = 16; 16 * 1.25 = 20). A 30% drop requires 33% gain. A 40% loss requires a 50% gain. It is amazing how many people hold on to a losers praying that it will go back up.
The Holy Grail of trading is buying at the bottom and selling at the top. I am comfortable craving out profits from the middle – by letting my winners run and cutting my losses quickly.
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Dear Mr Dawson
Thank you for the excellent article.
If possible please clarify your decision making.
1) It looks like you sold when DBA crossed southbound its EMA 50 but not before that. Am I correct?
2) Today DBA looks like it will cross its EMA 50 northbound. What is your recommendation on that?
Thank you in advance
I use a combination of trend Lines and stops to make my decisions. I sold part of the position on 3/10 and the remainder on 3/20.
As far as rebuying: visualize a downtrend line thru the 3/14 and 3/26 highs. The earliest that I would consider buying would be on a break of that downtrend line. If I really wanted to be conservative I would wait for the MACD line to cross.