Follow Buy, Sell Rules To Manage Volatility
Source: Investor’s Business Daily
By: Patrick Cain
Now, more than ever, you should be disciplined in your investing.
Recent market volatility is all the more reason to make sure you follow your buy and sell rules. Even minor deviations from the rules can result in big losses and missed gains.
When the market is in a correction, don’t buy stocks. Remember, three out of four growth stocks follow the general market’s direction.
When the market gets back to a confirmed rally, start investing with caution.
Not every market follow-through results in a new uptrend. But it’s OK to tiptoe into the market with small positions, adding to them as the stock and the market prove themselves.
But this “pyramiding” investing is only as good as the initial buy. That’s why you want to make sure you’re buying as close as possible to the proper buy point 14d never chase extended stocks — those more than 5% past their buy points.
Also, focus on stocks with superior sales and earnings growth, other strong fundamentals and institutional sponsorship.
Don’t be tempted by ex-winners that have plummeted to seductively low prices.
Look for strong volume on breakouts, at least 50% above average.
If you do find a strong stock — once the market is healthy — remember that it’s important to hold a stock if it climbs 20% in one to three weeks after it breaks out.
Lately, getting a stock that makes any significant gains has been a challenge. So knowing how to sell a stock to minimize losses is essential.
A key principle: Never take a loss greater than 7% or 8% from the price at which you buy a stock.
Historical studies have shown that winning stocks basically never correct more than 8% from their proper buy point.
Once a stock gives you a reason to sell it, do so. Don’t wait and allow losses to grow. The more a stock falls, the greater gain it needs just to get back to break-even.
If you do sell your stock, don’t hesitate to get back into it if the chart presents another buying opportunity. Many quality stocks will often have a shakeout and then run up, receding to the 10-week moving average and rallying from there.
If that happens, you don’t want to miss out.
Flir Systems (NasdaqGS:FLIR – News) offers an example of how following buy and sell rules keeps you on the right track.
The maker of thermal-imaging equipment set up in a cup-with-handle base starting last November.
The stock broke past the 31.97 buy point 14 high volume. 1
At this point, the market was in a confirmed uptrend.
The stock was up 20% from its buy point by May 2. That was longer than the rapid, three-week advance that indicates a stock has a longer run ahead of it. Still, it was a prudent profit to take at that point.
Flir had not given any sell signals, so it was also OK to continue holding.
The first sell signal came as it pierced its 50-day moving average (point 3). It was a serious sell-off, despite a good price recovery.
Still, Flir got shoved back below the 50-day line (point 4 )and couldn’t rally back. It was a smart time to sell.
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