While many people are concerned about what to do with a loser, they often forget that you need to plan for how to handle a winner. I employ a few strategies for dealing with this. First, I like to watch the uptrend -- if and when that's broken, that's certainly a good reason to sell some of the position.
Several successful traders I know use a simple 20-day moving average; when that cracks, they take profits. Another strategy is using the prior month's lows -- anytime a stock that's been moving higher breaks the previous month's lows, it's a sign that the trend may be over. This method can keep you in a strongly performing stock for several years.
Lastly, if a big winner gives back more than 25% of your gains, you may want to protect the rest of those profits by selling the stock.Before you select one of these methods, play with them to see how they fit you style. Back-test these tactics to see how long they would have kept you in the few stocks that have been working this year -- the homebuilders, defense plays or integrated oils -- and where you would have gotten out of tech and Internet names from the 1990s. The key is finding a methodology that works for you.
For Better or WorseA marriage pre-nup is designed to protect your assets before the honeymoon begins. Experience suggests that once the dishes are being thrown, having an objective, unemotional discussion about who gets what is all but impossible. The same thought process governs the stock pre-nup. It's designed to maximize your retention of assets in the likely event of an ugly equity break up. And it doesn't even need a lawyer!
|1.||Expect to Be Wrong||2.||Your Fault, Reader|
|3.||The Wrong Crowd||4.||Bull or Bear? Neither|
|5.||Know Thyself||6.||Prepare for Battle|
|7.||Bite Your Tongue||8.||Don't Speak, Part 2|
|9.||The Zen of Trading||10.||The Folly of Forecasting|
|11.||Lose the News||12.||Tracking Elephants, Pt 1|
|13.||Tracking Elephants, Pt 2||14.||Nothing Doing|
|15.||Surviving Silly Season||16.||The Zen of Trading|
|17.||Curb Your Enthusiasm||18.||Six Stocks|
|19.||Bended Knee||20.||Time Waits for No One|
|Check back for more of Barry Ritholtz's
Apprenticed Investor series