The bull market entered 2018 going great guns, showing no signs for now of letting up.
[ibd-display-video id=3037819 width=50 float=left autostart=true] There are a couple of reasons why that makes now a good time to make sure you know your sell rules.
First, you need sell rules to help you manage stocks that are posting leggy gains and may be due for a correction. The goal is to read stock chart signals and use them as a guide to help you take profits in a way that leaves you exposed as little as possible once a leading stock's pullback begins.
Second, by the time a market begins stalling out of an uptrend, it's often too late to try and study up. You need to know your rules beforehand, and have them close at hand when the status of the market goes to uptrend under pressure, and possibly into a market in correction.
The first sell rule to know, always, is the automatic sell rule triggered when a stock falls a maximum of 7% to 8% below its buy point. Exactly where you set that trigger is up to you. It can be 5% or 8%, depending on your confidence. The tighter you set it, the less money you lose in a downswing. But it also means you may be bumped out of a stock that corrects 7% to 8% (a common move) and then rebounds to retake its buy point. So where you choose to draw your absolute sell rule line is important.
For rising stocks, there are too many sell signs to list here. It's best to review the 'Technical Sell Signs' segment of William O'Neil's investing classic, "How To Make Money In Stocks." But the most common early caution flags include a break of an upper channel line , a drop below 10-week support in heavy volume or a rise of more than 70% above the stock's 200-day moving average .
None of these, on their own, constitutes a sell signal. But every warning that crops up increases the risk pressure a stock must work against in order to generate additional gains.
You typically wouldn't begin to trim a position at the first caution flag. But after two or three , it is a good idea to lock in some profit in order to reduce the amount of capital you leave exposed. This is particularly true if a stock also flashes non-chart warnings, such as a large number of big stock splits or if an uptrend comes under pressure.
All of this might sound confusing, and it does require some time and effort to grasp. That is exactly why you do not want to wait to begin your studies until you think your stock might be sending sell signals, or until sellers are driving the market.
When an uptrend comes under pressure or a market shifts into a correction, many stocks often begin to throw off multiple sell signals . This doesn't necessarily happen immediately. But it is a good idea when the market's status - reported daily in the Market Pulse feature attached to IBD's daily Big Picture column - does shift, that you tighten up your absolute sell level from 7% to 8%, usually to 3% to 5%.
If you use trading stops, set those to the level of your tightened sell rules.
As the common denominator beneath all of this, make sure you know your stock's base count and whether or not it is late stage . Other than the market's direction, that is the single largest determinant of the kind of pressure on your stock to pullback and reset its base count.