To maximize returns on your stock investment, you need not only to know when to buy at the right time but also when it is the right time to sell. You need a good and very disciplined sell strategy but most private investors don´t have own or do not follow their own rules.
A good strategy is implementing trailing stops. They work and protect your profits and your capital. Once your stock rises as planned and your trailing stop has been moved above your entry point you will never make a loss on this investment. Let your profits run!
Studies show strategies with restrictive rules that did give little room for holding on to stocks for emotional reasons are superior to flexible sell strategies. Disciplined trailing stop strategies eliminate emotionally driven trading errors. Don´t turn a losing trade into a long term investment! It eliminates wishful thinking of purely hoping that this stock turns around one day and starts going the right direction. Trailing stops are not the only effective tool but one of the best and very easy to implement. They ensure you that acceptable losses to you never turn into a nightmare or a total loss.
The idea is to define your risk, an acceptable point of loss, at which you are willing to drop your stock trade to protect your overall capital. Nothing is more important then to protect your capital. Taking a loss might be hard to swallow but when you protect your capital, you can have another shot and take other profitable opportunities in the future.
If you invest even 10% of your overall portfolio in one single stock and your trailing stop is set at 25%, then you only risk 2.5% of your total capital. In the worst case scenario you lost 2.5% but you have another 97.5% to regain your losses. Think about it!
Sven Franssen