Taking A Profit Or Loss
It's very tempting to create a spreadsheet and look at what would happen if only the share price did......

And while waiting for this to happen the share price goes up and down and you make nothing.

If the point of buying shares is to make a profit, then you must sell them to actually have a profit.

This sounds obvious but it is much harder to do than it is to say and even now I still sometimes get tempted to hold on too long and lose a 10% profit because a chart suggests that more is possible.

I blame it all on the spreadsheet and the profit amount column says that only another 10% rise and I can go and buy a Gold Rolex!

Following The Rules
When you purchase a share you should decide on sell criteria and then stick to them, typically based on three rules.
  • Sell at a certain profit, anything more than 10%-15% is drifting away from the short term.

  • Sell at a certain loss.

  • Sell regardless of price on a certain date.

When setting a sell price you may wish to consider if it is a share that is being traded in quantity by automated systems and the willingness of these systems to enter into numerous 2% cycles of buy/rise/sell/drop/rebuy.

If you reach your target profit, then take it. You thought about this amount when you bought the share and it is not a profit until you take it.

If you have chosen your target sell price correctly, it will go up a bit more, then stagnate or drop.

If your sell date arrives, then the market has no interest in that share, so sell. This rule is slightly flexible, but only slightly, if there is recent activity in that share then set a new sell date.

If you have bought a share after a big drop and a stabilization period the temptation to hold on for longer will be very strong as there is clearly more room for growth.

If you have hit your maximum loss the temptation is to hold onto a loss as "the price will recover with time."

This is a no no, waiting for the recovery can easily drag on and on and then never appear, during this time you funds are not generating a profit.

It is hard to do but you must accept that you will make some wrong decisions and lose money.

Once one of these criteria is reached you must sell as the important thing about this strategy is that trading takes place.

It is not at all unusual to see a share price drop 10%, 20% or even 40% overnight, so the profit that you thought you had has not just disappeared but you are now in a loss.

Equally it may rise overnight on good news, so it is important to be aware of things like reporting dates.

Finally it is a "bit off" but for the small investor the opening price is not the same as yesterday's closing price and you won't be able to trade at the opening price.


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