The art of knowing when to sell is one of the most critical skills any trader needs to master in order to be successful. Due to the fact that the emotions fear and greed tend to take over in selling decisions, we can end up hurting our bottom line performance.
When you have decisions to make that could be affected by emotion, it's good to have an explicit set of rules for entry, risk management, and exit. When it's time to consider your exit decision, here are some points you can think about:
Start by making sure you understand the basic concepts of technical analysis which are trend lines, support, resistance, price volatility, and candles. Knowing these things will help you find the exit signals.
* Trend line - shows general movement in the market over a period of time. An upward trend is when bottoms rise from left to right. These are also known as inflection points. Drawing a line from low to low will show you an upward trend.
* Support - is a floor established by the market over the long term. It's a low that shows you the least investors will take for current company fundamentals.
* Resistance - a ceiling price that shows the maximum which investors will pay for fundamentals.
* Price volatility - movement of a stock price over time. The more a stock price fluctuates, the more uncertain its investors are about the what the company fundamentals are worth. If a stock breaks out from a low price volatility, that shows you there is new information available on that company.
* Candles - represent a time period when either the sellers or the buyer pushed the price up beyond where it normally ranges. Look for the ones that are noticeably taller than the other candles before them.
Now that you have the tools you need to know when to sell, you may be wondering how to take advantage of them. The following is a list of rules for buying that can be reversed for short selling:
- If a stock price falls so that it closes below support price that was established prior to the entry signal, resign yourself to taking a loss.
- You need to be patient while stocks are in an upward trend. Don't look for an exit signal unless the variance between what the entry price was and the stop loss point of the stock has been doubled.
- If the orderly upward trend line is broken, and its risk amount has doubled, exit the trade.
- If you see that a stock has gone way above its upward trend line you'll know that it's going to pull back to the trend line, because emotion has come into play. Exit when the stock closes under the low shown by the last green candle.
- You might consider using a more aggressive exit strategy at times when the market is exhibiting abnormal selling signs. Even the strongest stocks can be pulled lower, so you need to keep your eye on the exit.
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