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