One of the more difficult tasks for beginning traders to learn is how and when to sell. Most traders cut their profits short and let their losses run, rather than the opposite. Why? Because most folks hate being wrong. This desire to be right transcends trading; it's human nature.
But the financial market will teach you that being wrong is an unavoidable part of life. It is literally impossible to escape being wrong in trading. Even choosing to remain on the sidelines ultimately will be proven wrong because of the toll inflation takes on your money.
You are always going to be wrong when you sell. You'll be either too early or too late, because it's impossible to sell at the very top. You might be fearful that you'll hold on too long and give back some of your paper profits.
So what do you do? You close the position, even though the stock is trending steadily higher. Your act of selling simply adds fuel to the uptrend because it puts you on the sidelines. You like the stock and regret selling too soon. So you buy it back, propelling the price higher. It's a feedback loop that ultimately breaks down, but never when you expect it to.
If a stock is moving against you, be quick to admit you are wrong. Again, being wrong is unavoidable. Failing to acknowledge your error does not equate to bravery, resilience or commitment; rather, it's a sign that you do not understand or accept the very basics of the financial markets, or of life. Once you embrace the idea of being wrong, you can get on with the business of making money in spite of your handicap.
You can, however, minimize the negative consequences of being wrong by using scaled entries and exits. A small initial buy should enable you to admit more easily -- and sooner -- that you are wrong, because your stake in the position is minimal, when admitting you are wrong won't cost you much money.
Further, a small initial sale when you fear overstaying your welcome within an uptrend also makes it easier to accept the possibility that you might be wrong and selling too soon. After all, you'll still be involved in the stock, albeit with a smaller share size.
As you peruse the charts below, try to remember that the various stops and entries highlighted on them are not necessarily "all or none" price levels. Rather, they can be used as the basis for partial entries or exits. Such an approach acknowledges the possibility of being wrong without sacrificing the opportunity to be right.
Let's get to those charts. Today, here are looks at
Titanium Metals is about as strong as they come now. I've drawn an eight-day moving average to capture the bottom part of the trading range. As long as this moving average contains the lows, the trend is intact. Each advance is followed by a brief pullback. I'd consider making a partial sale if the stock falls to the low $70s.
I last looked at UnitedHealth Group
April 25, when it was hovering around $50. At that point, I said the stock seemed to be firming up. That analysis was done on a daily chart, and was wrong!
The weekly chart shows an intact downtrend. Some might anticipate a bounce at $45 because of the brief pullback to this level in April of last year. But the trend is down, and if you are buying this stock, you either are using predetermined scaled entries or are trying to catch a falling knife. This stock will have to do a lot of work before I'd be a buyer.
Like Titanium Metals, Tetra Technologies is also going parabolic, so I've again used the eight-period moving average as the support reference line. This stock could fall $10 from its present position before even testing support. That's quite a pullback to sit through, so if you're long now and feeling uneasy, why not take just a bit off the table? Keep in mind, however, that there is nothing wrong with this uptrend. Any partial sale would be made only to reduce the size of this profitable position rather than to anticipate a reversal.
Volatility squeezes tend to run for a while after the expansion phase begins. That's what we're seeing here with DXP Enterprises. If you're long, there's no reason not to remain that way. But use a loose trailing stop on the entire position, with a tighter trailing stop on a portion of your position. Your use of partial, trailing stops is an acknowledgment that you might be wrong in holding the stock -- or in selling it. You reduce your risk while remaining in the game.
BioMarin hit a multiyear high in March and has been struggling ever since. At present, it looks like we might be seeing a lower high. But that's a premature analysis. The stock is still making higher lows. I wouldn't be a buyer until BioMarin pushed above $14, just above the top of the high-volume selloff day that followed the March peak. If the bulls push BioMarin that far up, it's likely that the uptrend will continue. A fall back below the middle Bollinger Band would be my signal to sell.
Be careful out there.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider DXP Enterprises to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Fitzpatrick had no positions in the stocks mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.