How To Sell Stocks: When To Take Profits | Learn How To Invest: IBD
Audio Brief
Show transcript
This episode covers offensive selling strategies focusing on disciplined profit-taking.
There are four key takeaways. First, implement a 20 to 25 percent profit-taking rule from the ideal buy point. Second, always base profit calculations on the stock's proper breakout point for objectivity. Third, understand that even strong stocks often pause or pull back after a 20 to 25 percent advance. Fourth, focus on accumulating a series of moderate wins rather than risking solid profits chasing exceptionally large gains.
This 20 to 25 percent rule is a systematic approach to secure gains, preventing winning trades from turning into losses, as illustrated by the At Home Group case study. Basing calculations on the ideal buy point ensures disciplined, objective selling decisions. Recognizing the market's tendency for consolidation after these gains validates timely profit-taking.
Ultimately, building portfolio returns is more reliably achieved by securing multiple moderate gains and reinvesting capital, rather than holding out for rare, larger moves.
This disciplined strategy prioritizes consistent profit realization for long-term wealth building.
Episode Overview
- The video distinguishes between two primary selling strategies: defensive selling to cut losses and offensive selling to protect profits.
- It introduces a key offensive selling rule: take profits when a stock is up 20% to 25% from its ideal buy point.
- The rationale behind this rule is explained, noting that stocks historically tend to pull back and consolidate after reaching this level of gain.
- A case study of At Home Group (HOME) is used to illustrate how applying this rule protects profits and how ignoring it can turn a winning trade into a losing one.
Key Concepts
- Defensive vs. Offensive Selling: Selling can be a defensive move to limit losses (e.g., the 7-8% stop-loss rule) or an offensive move to lock in gains from a winning stock.
- The 20-25% Profit-Taking Rule: This is a disciplined strategy to systematically take profits after a stock has achieved a significant, but common, level of appreciation from a proper breakout.
- Ideal Buy Point Calculation: The 20-25% gain should be calculated from the stock's ideal buy point, not necessarily from the exact price at which you bought it.
- Compounding Moderate Gains: The strategy emphasizes that building substantial portfolio returns is more reliably achieved by securing multiple 20% gains and reinvesting the capital, rather than holding out for a single stock to gain 100% or more.
Quotes
- At 0:29 - "Take most of your profits when the stock has risen 20 to 25% from a buy point." - This is the central offensive selling rule presented in the video for protecting profits.
- At 1:49 - "So if you had held the stock, you would have gone from a 20% gain to a 3% loss." - The speaker summarizes the risk of not taking profits by highlighting the outcome of the At Home Group (HOME) case study.
Takeaways
- Implement a disciplined profit-taking strategy, using a 20-25% gain from the ideal buy point as a primary benchmark.
- Always base your profit calculations on the stock's proper breakout point to maintain objectivity in your selling decisions.
- Understand that even strong stocks often pause or pull back after a 20-25% advance, making it a logical point to secure your gains.
- Focus on accumulating a series of moderate wins rather than risking solid profits by chasing exceptionally large, but far less common, gains in a single stock.
