What’s the #1 secret to successful investing?\u00a0 Are you ready?\u00a0 Yes, that’s right.\u00a0 It’s not to lose money.\u00a0 To be more specific, if you cut your losses at 5-10% when you are wrong, you will be much more successful.\u00a0 It’s all about capital preservation.<\/p>\n
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\u00a0An 8% loss on your investment, takes an 8.7% gain to recoup your loss<\/p>\n<\/li>\n
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\u00a0A 20% loss on your investment, takes a 25% gain to recoup your loss<\/p>\n<\/li>\n
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\u00a0A 50% loss on your investment takes a 100% gain to recoup your loss.<\/p>\n<\/li>\n<\/ul>\n
As you can see, the larger the loss, the greater the difference between that loss and the gain required to recover your losses.<\/p>\n
Taking Your Profit<\/strong><\/u><\/span><\/p>\n
3 To 1 Profit and Loss Strategy<\/strong><\/span><\/p>\n
William O’neill of the CANSLIM method recommends using a 3:1 Profit and Loss strategy.\u00a0 With a 3:1 strategy, you can be right only 33% of the time and just about break even.\u00a0 That is very important to remember.\u00a0 You can be wrong more than half the time and still make a profit if you keep losses small.<\/p>\n
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Lock in profits at 20-25%, while keeping losses at 7-8%<\/p>\n<\/li>\n<\/ul>\n
When To Hold For Much Larger Gains<\/strong><\/span><\/p>\n
Locking in profits at 20-25% is a sound profit taking strategy for most stocks, but there will be times when a stock exhibits characteristics of big winner.\u00a0 A homerun stock!\u00a0 You want to find a few homerun stocks that will gain 100% or more in order to offset your small losses and provide a big gain for your portfolio.\u00a0 The companies you have unearthed by ringing them through the filter all have characteristics of former big winners, but just a handful will provide huge gains.<\/p>\n
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Stocks that gain 20% or more in the first 3 weeks after breaking out, it should be held for a minimum of 8 weeks.\u00a0 These stocks have have the potential to provide huge returns.<\/p>\n<\/li>\n<\/ul>\n
Note: The above percentages are general guidelines.\u00a0 When making a sell decision it’s important to take into account the price\/volume action and support\/resistance areas.\u00a0 In a choppy market I may settle for a 2 or 2.5% to 1 win loss ratio.<\/p>\n
Selling the Homerun<\/strong><\/p>\n
So all your hard work has paid off and you’ve finally purchased a stock that has bolted to gains of 125% over the last few months.\u00a0 There are no cut and dry rules for selling these stocks, but there are a number of things to look for that may signal the end of the run.<\/p>\n
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New Highs On Low Volume
\nIf a stock has had a nice run, but makes new highs on decreasing volume, it means institutions are <\/span><\/strong><\/p>\n<\/li>\n- \n
Exhaustion Gap and Climax Run<\/strong>
\nAn exhaustion gap and resulting climax run usually signals that the run is over.\u00a0 This will occur at the end of a long run and the stock is in the media spotlight.\u00a0 Everyone knows about the stock, it’s been featured on CNBC and a major financial publication.\u00a0 The exhaustion gap is a flurry of last minute buying out of greed and it signals that there are few buyers left to propel the stock higher.\u00a0 The stock may run up 25% or more in a short time.\u00a0 It is your clue to sell.<\/p>\n<\/li>\n- \n
Extension Above Major Support
\nLook to sell if the stock climbs 50-75% above the 50DMA or 100-125% above the 200DMA<\/span><\/strong><\/p>\n<\/li>\n- Violation of Long Term Trend Lines Or Support Levels
\nIf a stock breaks through an upper level trend line it may be near a top.\u00a0 On the other hand, if a stock breaks below major support at the 50DMA , 200DMA or lower trend line, it no longer has institutional support.\u00a0 This should be your final warning to get out.
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Base Stage
\nBy the time a stock begins to carve out a 4th stage base, it is probably overvalued as the general public has caught onto it.\u00a0 Stocks rarely perform a successful breakout from late stage bases.<\/span><\/strong><\/p>\n<\/li>\n- \n
Excessive Stock Splits
\nMore than one stock split over the course of a year can derail a stock.\u00a0 Not only does it increase supply, but it usually occurs after most investors have become aware of it.<\/span><\/strong><\/p>\n<\/li>\n- \n
Media Frenzy
\nIf you find your big winner on the cover of Forbes or featured on CNBC, chances are good that those who want to purchase the stock already have or will soon.\u00a0 If you run out of buyers, the only place for the stock to go is down.<\/span><\/strong><\/p>\n<\/li>\n<\/ul>\n\n
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