By Al Thomas
When the stock market is going up and all your stocks, ETFs and mutual funds are making money you feel like a genius. It is too bad that some folks donít remember what happened in 2000 and 2008. Of course, right now we are in one of those genius phases.
Your broker and financial planner are encouraging you to buy, buy, buy. And I canít fault that at this time. You remember back in 2008 how many times they told you to buy, buy, buy while the market was going down, down, down? Are we headed for another 2008? I donít predict, but I do listen to the voice of the market.
The great Wall Street mantra is ďbuy a good stock and put it awayĒ. Did you keep Enron and Global Crossing? Even if these were exceptions because of fraud a smart investor would not have lost any money. In fact he could have made a nice profit. But Al, they went under. But the smart money still made out because they got out near the top. As a former exchange member and floor trader I was not right every time I bought something and I especially did not like giving back nice profits that had accumulated. You donít have to be psychic to know when to sell and donít think you are going to be able to pick the top. A really smart trader waits for a stock or fund to start up and then jumps on it with both feet. When it starts down he jumps off looking for another equity that is going up. The wise trader knows he canít buy the bottom and sell the top. What he wants is a big bite out of the middle.
When you make a sandwich most of the meat is in the center and a professional trader does the same with his trading. He wants to take a bite out of the middle of the move. You can do this too by looking for stocks, mutual funds or Exchange Traded Funds that have a nice upward pattern. As I said before buying is not the secret. Then what is?
You must learn to sell - for two reasons. First to protect your equity after your initial purchase and second to keep from giving back profits you have made as the equity advances. The great Wall Street secret is an exit strategy: knowing when and how to sell. Unless you learn to sell you will not be successful in the market. Brokerage companies do not want you to sell and rarely issue sell signals. You must decide how much you are willing to risk before you buy.
The simplest way is with a percentage stop loss order of 5%, 7%, 10%, 12%, whatever you can live with. Instruct your broker to place a trialing stop or you can change it yourself every week. Do not lower a stop.
Selling is the great secret you will never hear from your broker.
Copyright 2013 Williamsburg Investment Co. All rights reserved. Al's new ebook (32 pages) is available on Amazon.com for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learn one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. The title is Never Lose Money In The Stock Market Again.