🚪When to Sell: How to Have Exit Rules in Place and Avoid Mistakes

Introduction

Investing is full of decisions, and one of the hardest is deciding when to sell. Why should you consider exit rules before you invest? The answer is simple: when it comes to selling, emotions can take control. Having clear exit rules will help you adhere to logic rather than emotions.

Exit Rules

There are several key rules you should keep in mind when making selling decisions. These rules will help narrow your options and make more informed decisions.

1. Target Price (Take-Profit)

The target price is the price at which you plan to sell your stock once it reaches a certain value. For example, if you purchased Apple (AAPL) stock for 150 CZK and set a target price of 180 CZK, you will sell it once the price reaches that level.

2. Protective Stop

A protective stop is the price level at which you are prepared to sell a stock to limit losses. If, for example, you buy Microsoft (MSFT) stock at 300 CZK and set a protective stop at 280 CZK, you will sell the stock once the price falls below this threshold.

3. Time Stop

A time stop is a rule that says you will sell a stock if you hold it for longer than planned, regardless of its price. For example, if you invested in Coca-Cola (KO) stock with a plan to hold it for a maximum of one year, and now it has been in your portfolio for 15 months, you should consider selling it, regardless of its current value.

4. Thesis Change

This rule states that if the reason you bought a stock changes, you should consider selling it. For example, if you bought NVIDIA (NVDA) stock for its growth in the tech sector, but the company starts facing significant issues, it’s time to sell.

Partial Sale (Trimming)

Instead of selling all your stocks at once, it is sometimes wise to sell only a portion. This process is known as partial sale or trimming. It can help you realize profits while still keeping some investment in the asset for potential future gains.

Avoiding Mistakes

There are two main mistakes that investors often fall into:

• Selling winners too early: Many investors fear the stock price will drop and sell their stock while it is still on the rise. By doing so, they miss out on potential future profits.
• Holding onto losses too long: On the other hand, some investors ignore losses, hoping the stock value will recover. This can lead to significant losses.

How to do this in QMA

In QMA, you can track and evaluate your exit strategies in the /journal section. You will use this section to record your investment thoughts and the rules you have established for each stock. For example, you will be able to document your target prices, protective stops, and other important parameters that will help guide your decision-making during exits. You can also use the /screener feature to find stocks that meet your exit criteria.

Conclusion

Having clearly defined exit rules is crucial for successful investing. Remember that selling stocks based on emotions can have dire consequences. Planning and documenting your strategies will help keep you on the right track.

Disclaimer

QMA is an analytical and educational tool, not investment advice. Past performance is not a guarantee of future results. All investment decisions are your own responsibility.