This article originally appeared on April 27, 2013 on Real Money. To read more content like this + see inside Jim Cramer's multi-million dollar portfolio for FREE. Click Here NOW.
It is often said that successful trading is a simple matter of cutting losses and letting profits run. That logic is irrefutable, but like most advice, the challenge is the actual implementation of the general concept. It is easy to state the rule but quite difficult to actually live it.
One of the ironies about stock market advice is that the vast majority of it is focused on the buy decision. I would guess that at least 90% of the stories about stocks are about which ones you should buy.
Based on that, you might think the main thing that determines investing and trading success is buying the right stock. While that is extremely helpful, the sell decision influences your success to a much greater degree. Anyone can buy and hold a stock, but the ability to cut losses and take gains makes the big difference. We all know of people who made a lot of money buying great stocks but then they gave it all back because they had no idea how to sell.Selling boils down to two basic approaches: trailing stops or selling into strength. Each has its advantages and disadvantages, and what works best depends on the overall market action, the nature of the stock and your style of trading. The trailing stop is probably the most common method used by traders. You set a price level maybe 7% to 10% below the current price and keep on moving it up as the stock runs. This works great in a strong market with trending stocks. As long as there isn't any great volatility along the way, you keep building your profits, then exit and lock them in when the turn finally occurs. LinkedIn (LNKD) is a good example of how that would have worked quite well if you bought the stock following its very strong fourth-quarter report. There was one slight pullback in early April but if you used a loose trailing stop, you could easily have ridden this trade 20 to 40 points.
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