Image Source: Pexels

One of the many questions I get throughout every trading day is, “Bob, when do I sell?” Knowing when to sell stocks or options is the million dollar question.

My advice may frustrate some:

When you want to sell, you sell.

One of the hardest things for stock and options traders is finding the sell button. We tend to ignore the rules of risk management we put in place to guide our trading, especially when a trade keeps moving higher.

This also happens when our trades start moving down. We become defensive and less likely to cut our losses and move on. Instead, we cling to the hope that our losses recover to breakeven or even a little profit. This stubbornness leads to inaction, which can then lead to disastrous losses.

Put rules in place to sell stocks or options

Managing risk is your number job. This isn’t always easy, because our minds like to wander and dream about hitting it big. “What am I going to do with all of that money?”

Wondering is not a trading strategy. We need to have a process and rules in place to take the guesswork out of when to sell. Following those rules will protect us from disasters, which can happen at any moment unannounced.

Ask someone who was trading on Black Monday in 1987. The Dow Jones lost almost 23% in one session. If you had a stop-loss strategy in place and followed it, you could have saved yourself from massive losses.

If we choose to break our risk management rules and are rewarded for it, we’ll feel free to continue ignoring them. Eventually, we will suffer the consequences when a trade does not go our way.

Many hedge funds rely on computer programs, AI, and hyper trading with stops to help them manage risk. They have taken the human element out of the decision process, allowing an algorithm or proprietary program to tell the fund manager when to sell. As individual traders, we don’t have that luxury.

Write down your rules

Think about your risk tolerance. Perhaps when a trade loses 1%, you sell. Or when it gains 35%, you sell.

It doesn’t matter – each of us has different levels of risk tolerance. What’s important is to write down those rules and be faithful to them.

Now, I am not so naive to believe we will follow our rules 100% of the time. It’s just not going to happen when emotions and multiple scenarios are present.

What’s important is to learn to control our instincts and stay away from the FOMO (fear of missing out). Only then can we make objective decisions and sell when we want to do it, not when the market forces us to exit.

If you enter a trade with the goal of a 30% return based on your criteria, and it goes up say, 25% in four sessions, do you take the gains right there rather than try to squeeze out the additional amount?

Traders may answer this differently, but suffice it to say, if you have a rule to sell when you have a profit, then that’s the time to sell.

Remember: you’ll get trades wrong

More importantly,realize that you’re going to get trades wrong from time to time. Maybe all the indicators were lined up in your favor, but then some big earnings reports come out and your trade starts moving in the wrong direction. Don’t pretend a bad situation is not happening.

We don’t predict the future. We play the best probability trades in the moment and follow along for the result. If a trade is not working, you’ll know it soon. Just hit the sell button and move along. That next trade may be the one that makes up the loss and puts you back into the green.

More By This Author:

Most Favorable Stock Technical Indicators
Still In Small Caps – Tesla Turnaround
SoFi Technologies Inc: Chart Analysis