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Rev Shark: The 'Sell Decision' Is Paramount

Stocks in this article: AMZNLNKD

The other approach is to sell into strength. This works best when conditions are choppy and stocks are volatile. If stocks are moving around quite a bit, a trailing stop doesn't provide much profit potential. If you set them too tightly you will be quickly stopped out, and if you set them too loosely then you increase your risk of big losses.

Selling into strength allows you to lock in profits and maybe give it another try as the stock moves around. The big risk is that the stock will start to trend and you will be left behind, but more often than not stocks will give you numerous opportunities to re-enter.

A good example of a stock where selling into strength works well is Amazon (AMZN). If you sold into the spikes as they hit resistance, you had a good opportunity each time to rebuy at lower prices and trade it again.

You can never know for sure which approach to selling will work the best. It changes all the time as the market action changes, and it will vary with each stock that you trade. I find that it works well to use a mixed approach. I'll take some partial profits into strength but hold a portion of my shares with a trailing stop. If the stock continues to run, I may wish that I held on to more, but taking partial profits assures me a good return in the event that a trade suddenly turns south.

I've only scratched the surface of the sell decision, but probably the most important point I can make is that you must have a strategy. The biggest mistake people make is that they buy a stock and then have no plan on what they will do as it moves up and down. At a bare minimum set a loose trailing stop and keep in mind that just because they're stopped out, it doesn't mean they can't buy the stock again. The important thing is to limit losses in a systematic manner.

At the time of publication, Rev Shark had no positions in the stocks mentioned.

James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.

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