5 Proven Methods for Selling Stocks (2024)

Choosing when to sell a stock can be adifficult task. For most traders, it is hard to separate their emotions from their trades, and the two human emotions that influence traders when they are considering selling a stock are greed and fear. Traders are afraid of losing or not maximizing profit potential. However, the ability to manage these emotions is the key to becoming a successful trader.

For example, many investors don't sell when a stock has risen 10% to 20% because they don't want to miss out on more returns if the stock shoots to the moon. This is the result of greed and a desire that the stock they picked will become an even big winner. On the flip side, if the stock price fell by 10% to 20%, a good majority of investors still won't sell because of their reluctance to realize a loss in the event that the stock rebounds significantly. There is the additional fear that they might end up regretting their actions if the stock rebounds.

So, when should you sell your stock? This is a fundamental question that investors struggle with. Fortunately, there are some commonly used methods that can help investors make the process as methodical as possible, and remove any emotion from the decision. These methods are the valuation-level sell, the opportunity-cost sell, the deteriorating-fundamentals sell, the down-from-cost and up-from-cost sell, and the target-price sell.

Key Takeaways

  • Managing fear and greed is key to becoming a successful investor.
  • Investors should be as methodical as possible, removing any emotion from their decisions.
  • In the valuation-level sell strategy, an investor sells once a stock hits a certain valuation target or range.
  • The down-from-cost sell strategy is a rule-based method that triggers a sell based on the amount (i.e. percent) that an investor is willing to lose.

Valuation-Level Sell

  1. The first selling category is called the valuation-level sell method. In the valuation-level sell strategy, the investor will sell a stock once it hits a certain valuation target or range. Numerous valuation metrics can be used as the basis, but some common onesare the price-to-earnings (P/E) ratio, price-to-book (P/B),and price-to-sales (P/S). This approach is popular among value investors who buy stocks that are undervalued. These same valuation metrics can be used as signals to sell when stock becomes overvalued.

As an illustration of this method, suppose an investor holds stock in Walmart (WMT) that they bought when the P/E ratio was around 13 times the earnings. The trader looks at the historical valuation of Walmart stock and observes that the five-year average P/E is 15.8. From this, the trader could decide upon a valuation sell target of 15.8times earnings as a fixed sell signal.

Opportunity-Cost Sell

An additional strategy is called the opportunity-cost sell method. In this method, the investor owns a portfolio of stocks and sells a stock when a better opportunity presents itself. This requiresconstant monitoring, research, and analysis of both their portfolio and potential new stock additions. Once a better potential investment has been identified, the investor then reduces or eliminates a position in a current holding that isn't expected to do as well as the new stock on a risk-adjusted return basis.

Deteriorating-Fundamentals Sell

The deteriorating-fundamental sell method will trigger a stock sale if certain fundamentals in the company's financial statements fall below a certain level. This selling strategy issimilar to the opportunity-cost sell in the sense that a stock sold using the previous strategy has likely deteriorated in some way. When basing a sell decision on deteriorating fundamentals, many traders will focus mainly on the balance sheet statement, with an extra emphasis on liquidity and coverage ratios.

For example, suppose an investor owns the stock of a utility company that pays a relatively high, consistent dividend. The investor is holding the stock mainly because of its relative safety and dividend yield. Furthermore, when the investor bought the stock, its debt-to-equity ratio (D/E) was around 1.0, and its current ratio was around 1.4.

In this situation, a trading rule could be established so that the investor would sell the stock if the D/E ratio rose over 1.50, or if the current ratio ever fell below 1.0. If the company's fundamentals deteriorated to those levels–thus threatening the dividend and the safety–this strategy would signal the investor to sell the stock.

Down-From-Cost and Up-From-Cost Sell

The down-from-cost sell strategy is another rule-based method that triggers a sell based on the amount (i.e. percent) that an investor is willing to lose. For example, when an investor purchases a stock, they may decide that if the stock falls 10% from where they bought it, they will sell it.

Similar to the down-from-cost strategy, the up-from-cost strategy will trigger a stock sale if the stock rises a certain percentage. Both the down-from-cost and up-from-cost methods are strategies that will protect the investor's principal by either limiting their loss (stop-loss) or locking in a specific amount of profit (take-profit). The key to this approach is selecting an appropriate percentage that triggers the sell-by taking into account the stock's historical volatility and the amount that an investor is willing to lose.

Target-Price Sell

The target-price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as evidenced by the popularity of the stop-loss orders with both traders and investors. Common target prices used by investors are typically based on valuation model outputs such as the discounted cash flow model. Many traders will base target-price sells on arbitrary round numbers or support and resistance levels, but these are less sound than other fundamental-based methods.

Bottom Line

Learning to accept a loss on your investment is one of the hardest things to do as an investor. Oftentimes, what makes investors successful is not just their ability to choose winning stocks, but also their ability to sell stocks at the right time. These common methods can help investors decide when to sell a stock.

5 Proven Methods for Selling Stocks (2024)


5 Proven Methods for Selling Stocks? ›

These methods are the valuation-level sell, the opportunity-cost sell, the deteriorating-fundamentals sell, the down-from-cost and up-from-cost sell, and the target-price sell.

What is the 3 5 7 rule in trading? ›

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

What is the 10 am rule in stock trading? ›

Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.

What are the five types of trading? ›

Different Types of Trading in the Stock Market and Their Benefits
  • Day Trading. Day trading, a.k.a. Intraday trading, is one of the most common types of trading in the stock market. ...
  • Positional Trading. ...
  • Swing Trading. ...
  • Long-Term Trading. ...
  • Scalping. ...
  • Momentum Trading.
Oct 31, 2023

What are the methods of selling new shares? ›

Different Options for Selling
  • Going Public.
  • Selling to Large Private Investors.
  • Selling to Smaller Investors.
  • Selling to Employees.
  • Decide on Your Future.
  • Know What Your Shareholders Want.
  • Determine Your Business's Value.
  • Create a Marketing Strategy.

What is 90% rule in trading? ›

The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.

What is the 80% rule in trading? ›

The Rule. If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.

What is the 15 minute rule in stocks? ›

You can do a quick analysis, adjust your trading strategy and get into a good position well after the crowd pulls the trigger on a gap play. Here is how. Let the index/stock trade for the first fifteen minutes and then use the high and low of this “fifteen minute range” as support and resistance levels.

What is No 1 rule of trading? ›

Rule 1: Always Use a Trading Plan

You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.

What is the 11am rule in the stock market? ›

​The 11 am rule suggests that if a market makes a new intraday high for the day between 11:15 am and 11:30 am EST, then it's said to be very likely that the market will end the day near its high.

Which is the safest trading? ›

First, trade with money you can afford to lose. Second, trade positions that are so small that you may think, “What's the point of even putting on the trade.” If you can minimize the personal significance of a trade, you will feel safer and at ease.

What is the most profitable type of trading? ›

Among the various strategies studied, momentum investing appears to be the most profitable trading strategy. The classical momentum strategy, based on performance over the previous 2-12 months, has consistently earned positive returns over the period from 1965 to 2014, with an average monthly return of 1.57%

What is the safest form of trading? ›

Many a times the safest form of trading is that where you make use of the limit order and the stop loss. This is often common in Forex trading. This can be done by observing the patterns of trading and predicting the market action. All in all, a disciplined, patient and educated trader is who we call a safe trader.

What is the best way to sell stocks? ›

The target-price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as evidenced by the popularity of the stop-loss orders with both traders and investors.

How to sell stock immediately? ›

KEVIN: A market order is your go-to when you want to get out of a trade as quickly as possible during standard market hours. Generally, they execute immediately, but remember, the trade-off here is price. You will receive the current price, which could be different from the last bid you saw.

What is the best way to sell shares? ›

A limit order allows you to sell a share when it reaches a certain price or above that price, while a stop order is for when a share reaches a pre-set price or falls below it. Finally, a stop-limit order can be used to sell shares at a set price – but only if this is the minimum you want.

What is the golden rule of traders? ›

Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.

What is the 70 30 trading strategy? ›

The 70/30 RSI trading strategy has two threshold levels

The RSI, which has a range from 0 to 100, is commonly used to identify overbought or oversold conditions in a market. The 70/30 RSI strategy involves setting two threshold levels on the RSI indicator: 70 for overbought conditions and 30 for oversold conditions.

What is the 3 30 rule in trading? ›

This rule suggests that a stock's price tends to move in cycles, with the first 3 days after a major event often showing the most significant price change. Then, there's usually a period of around 30 days where the stock's price stabilizes or corrects before potentially starting a new cycle [1].

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