The question of when to sell a stock for a profit is as important as the question of which stocks to buy, yet there is a lot more information on how to buy stocks than on when to sell them. Your individual trading style may determine some selling decisions -- for example, day traders routinely sell their positions at the end of each trading day -- but a few general suggestions can be applied to most situations.
Investors use a combination of fundamental and technical analysis to select stocks to buy, but most sell signals are technical in nature. Fundamental analysis looks at such factors as a company’s sales and earnings, balance sheet and business prospects. Technical analysis, meanwhile, examines a stock’s price and volume action, which is graphically represented by a stock chart. Sell signals are mostly technical in nature in that a stock’s price weakness often shows long before a company’s fundamentals deteriorate.
A stock typically rises in a succession of advances and consolidations resembling a staircase; this movement is often described as "higher highs" and "higher lows." Each time a stock moves higher, it makes a new high that is higher than the last high; when it pulls back and makes a new low, it is still higher than the last low. At some point the stock fails to make a new higher high, and instead turns down and makes a new low that is lower than the last low. This "lower low" is a strong sell signal indicating that the trend has changed from up to down.
Some high-flying stocks end their runs in unsustainable parabolic rises. This occurs when a stock that has been advancing for a while suddenly starts moving faster and higher each day so its rise looks almost vertical on a daily chart. These advances are unsustainable and usually signal market tops, which represent good places to sell.
50-Day Moving Average Violation
Investors often use a 50-day moving average line to gauge a stock’s direction. A 50-day moving average line is created by plotting an average stock price over the preceding rolling 50 trading days. A rising stock has a rising 50-day moving average line; the strongest growth stocks typically advance above their 50-day moving averages. If after a long advance above the 50-day moving average a stock closes below this line, it is a potential sell signal. Wise investors will sell if the stock moves below the low of the day on which it closed below the 50-day moving average.
- “When to Sell: Inside Strategies for Stock Market Profits”; Justin Mamis, et al.; 1977
- “How to Make Money in Stocks”; William O’Neil; 2009
- “Stan Weinstein’s Secrets from Profiting in Bull and Bear Markets”; Stan Weinstein; 1988
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.