December 20, 2014
An exit strategy is basically selling at a gain or loss, while trying to minimize the possible loss option. One of the most popular questions I receive is, “when do I sell,” and it is related to exit strategy. As a trader, I never want to give another trader a definite buy or sell answer because we are each responsible for our own trades in the end. I offer free advice and accept no liability for a reason- to protect both sides of the learning process. I do have one insight that I try to trade by however- sell with a greed line in mind and use stop losses to protect from large losses.
A greed line is an amount or % that acts as a trading goal with a ticker or stock option. A greed line can help a trader be disciplined in taking the gain as it presents itself while limiting the loss of that gain should greed step in and the pps tank.
A stop loss is a trading transaction a trader can set at a certain pps so a holding will be sold when met. An example is trading $EBAY Calls at $55 at $1.20 and setting a stop loss at $1.00 should the Calls start to lose 20% of the value to $1.00. The stop loss will limit a trader’s loss. A stop loss gives a trader discipline to leave a losing trade and to wait for a better time to re-enter, or to look for a new opportunity.
When to sell is the toughest part of our trading because we want to see our holdings be green, at a gain, and when red starts to creep in the many psychological emotions start to nag at us. I use chart analysis, called technical analysis, and the level 2 for penny stock trading to gauge my entry and exit for my perceived best pps in either side of a trade. This analysis along with knowing how long I should try to hold, what my strategy is, and controlling my emotions aids in obtaining more consistent trading gains. Having a greed line ultimately helps a trader avoid being too greedy and missing a great gain if a ticker pps all of a sudden tanks and places the trade into red status.
When to sell is related to how long a trader should hold in a trade. It’s an estimate period of holding that a trader makes before trading, and if no sizable gain appears at the end of the period it’s time to look for a new opportunity. I’ll be writing a separate post to discuss this important topic.
Trading psychology is important to know and understand so trading fears can be combated that arise while trading. Some trading psychology reference material:
The Psychology of Trading by Deron Wagner
Trading Psychology Edge
Day Trading Coach
Incredible Charts Trading Psychology
Trading psychology quick summary (from the links above not necessarily my view point 100%):
+ Your biggest enemy when trading is yourself. Learn to control your emotions.
+ Four important psychological states during trading: fear, greed, hope, and regret. Don’t let these control your trading decisions.
+ Admit when you’re wrong. Learn from your analysis and research mistakes.
+ Accept trading losses and move on knowing you can and will trade better.
+ Learn and Utilize: Caution, patience, conviction, detachment, focus, expect the unexpected, average up- not down, and limit your losses.
+ Paper trading is a great way to test strategies but doesn’t help a trader feel emotions that need to be controlled. When your money is on the line you have something to lose and it is then that your emotions kick in.
+ 3 day trading secrets: Only 10% of traders beat the market and garner consistent gains; traders are wrong at least 50% of the time; and trading success is dependent mainly upon the trader’s personality (master self then the market.
With holding period, strategy, trading psychology, and a greed line known a trader can better grip on when to sell a position.
Please note: I don’t trade OTC tickers anymore but have a great deal experience with trading these trading vehicles in the past. The rest of this post was when I did trade OTC tickers and can be applied to big board tickers in many ways.
I’m going to use a trading friend’s mid-term hold suggestion $AMMX as an example of how to evaluate when to sell.
$AMMX was suggested to me in March 2014 after a decent uptrend of a couple months. The 2-month chart peaked my interest and I then applied my UPtrend strategy and chart analysis to see if $AMMX would be a good mid-term hold.
+ 2-3 day uptrend: Met.
+ Recent PRs from company: Met.
+ TA with PSAR of buy signal, 30+ ADX with +DM above -DM, and CCI above 0 or oversold below -100: Met.
+ Positive ticker board presence on iHub: Met.
With my basic analysis complete I had one large red flag in my mind and that was the company’s pink limited status on the OTC. I decided to watch $AMMX. Here’s a 1-year chart that shows the pps progress to 8/19/14.
Late in the evening on 8/19/14 my friend mentioned $AMMX’s trading day was a “bloodbath” in a trading chat room. I had been following $AMMX since March 2014 and knew the pps had been trading sideways since May 2014 after a decent uptrend from February to the end of April 2014.
This 6-month chart from the Stocks Pro iPhone app shows two candle dips breaking the sideways trading support range. The pps dip had fallen at least 50% from the gains possible between Feb and Apr 2014. My friend hadn’t mentioned the common question, “when should I sell,” but I knew the question was lurking.
“Should I sell now?”
“The chart shows sell indicators but I want to hold mid-term.”
“I’m still up and this may bounce back.”
The emotions of fearing loss, greed to get more gains, hope that $AMMX could still uptrend again, and regret for not taking more profits back before this pps dip would be nagging me.
The level 2 shows a widening spread, that is a large pps difference between the Bid and Ask. The company’s news has been consistent since Feb. The IHub board, a popular trader medium, interest has dwindled. But don’t forget the oversold indicators on the chart around 8/18-8/19/14. FYI- The iHub news has had known issues reporting all news links in the past. Be sure to visit QuoteMedia or Yahoo! Finance for better news research.
My friend had a strategy, holding period, emotion control, and a greed line as I do. My friend decided to hold mid-term for at least 3-months and stomached the sideways trading that occurred. My friend was is in a pivotal point in the $AMMX trade: sell or hold?
At this point I had no intention of telling My friend what to do. I had laid out the facts and chart analysis. Now it was time to do what traders do- trade.
Here’s what I would do depending on these situations.
I had entered $AMMX in Feb 2014
Greed line- I would have exited at a 50% gain attained by mid-Mar. I may have attempted re-entry based about chart analysis.
If I had made entry in Apr
Chart analysis- I may have been tempted to sell in May when the sideways trading started. This sell in May would not have met my 50% greed line but would have been technically, that is based on chart analysis, a wise move.
I purchased $AMMX in May 2014
Chart analysis- I would have held until the CCI hit 200 in early August. In hindsight it’s easy for me to say I would have expected the dip, but based on chart analysis in the beginning of Aug that would have been my exact conclusion.
If I was still holding $AMMX at the pps dip in the second week of Aug
Control emotions and accept lose- I would sell based on my stop loss of 20-30% only if the oversold condition in the charts 8/18-8/19/14 didn’t net a bounce. Company news has been consistent and active since Feb 2014 and trading buyer sentiment seems to be stale. If I did sell, then I’d look for re-entry later given its a mid-term hold estimate based on chart and other analysis.
You’ll notice I placed key phrases in front of my suggested trading actions. I try to think this way to substantiate my trading decisions.
In summary, the decision to sell is tougher than to buy. Our emotions such as fear, greed, hope, and regret can make us make decisions not based on fundamental and technical analysis. Having a greed line allows us to have a goal and to take the gains without greed clouding our judgement.
Here’s a bonus table for how much gain % you need to recover X losses:
-10% loss -> 11.11% to get back
-20%-> 25%
-30%-> 42.86%
-40%-> 66.67%
-50% -> 100%
-60%-> 150%
-70%-> 233.34%
-80%-> 400%
-90%-> 900%
-100%-> you’re done
toohightoolo 