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Knowing When It’s Time to Sell

by Michael Kahn

Listen to Michael Kahn's presentation at the AAII Investor Conference!

Most investment sites, courses and gurus offer all sorts of ways to find stocks to buy. Whether they are fundamental, technical or dart throwing, there is no shortage of experts telling you where to put your money.

The problem is that buying is only half the job. Unless you plan to leave your portfolio to your children, at some point it will be time to sell some stocks and turn paper profits into actual cash.

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Michael Kahn CMT, writes the twice-weekly Getting Technical column for Barron’s Online (www.barrons.com) and the daily Quick Takes Pro newsletter (www.quicktakespro.com). Kahn will be speaking at the AAII Investor Conference this fall; go to www.aaii.com/conference for more details.


Discussion

Paul Hervey from Iowa posted 9 months ago:

could you do the charts for caseys please


William Hutchinson from Arizona posted 9 months ago:

It's hard to tell a dip from a trend until the trend has taken away much of the gain.


Toan Nguyen from California posted 9 months ago:

It's always easy to look back and see that certain analysis make sense.


Werner Emmerich from Pennsylvania posted 9 months ago:

The RSI in conjunction with the 50 day moving average is actually quite a good tool for defining a trend, if you learn how to use it, especially for the entire market, where there are not so many other comparisons available. Some professionals are so good that they can infer a trend just from looking at a performance chart. I am not one of them.


Harish Jethwa from Maryland posted 9 months ago:

I use 10/20/50 day averages, bollinger bands
and MACD, also RSI at Yahoo finance, to buy or
sell. I think they give good signals.
what do you think?


Norton Waterman from Kentucky posted 9 months ago:

I agree with the two previous views.


James Grant from Ohio posted 9 months ago:

First, I have to say that I am very happy to read another article in the AAII Journal that offers advice on how to "use" technical analysis indicators to make trading decisions, rather than "how they are calculated". --- However, I was disappointed that Mr. Kahn copped out in the last couple sentences of his article, implying that investors should take fundamentals analysis into account, too.

I read the article pretty closely twice. While there are section titles, the rules to sell are largely buried in the text. Here's a list of the ones I was able to identify.

1. Sell when a series of higher highs and higher lows changes over to lower highs and lower lows.
2. Sell when the momentum indicator (RSI 14) rises above the upper threshold and then starts to fall.
3. Sell when the price falls below the 50-Day Moving Average (MA).
4. Sell when the Relative Strength line heads down.
5. Sell when a new low occurs after a new high is not reached.

These leave me with some questions for Mr. Kahn.

(1) If you believe (and I do) these rules are good enough to base a sell decision on, is there any reason you would not propose using the opposite rules to base buy decisions on?

(2) Are you proposing that an investor sell if any one of the rules is met? All five are met? Two of five?

(3) In the spring of 2012, AAPL's price dropped below its 50-Day MA and its RSI 14 was heading down. Is there any reason you wouldn't have sold then?

(4) If an investor uses your sell rules, are you confident that over the long run, he/she will materially make more money than just investing in a professionally managed fund that invests in the S&P 500?

(5) In regard to #5, when a new low occurs, how many past days, weeks, months should be considered to determine that it is a new low?

(6) What is the difference between #1 and #5?


I also offer these opinions to other readers of these posts:

* 50-Day MA - Using that technical indicator, an investor could take a 20% loss, as happened with AAPL in the spring of 2012. That's too much for me. There are several other technical analysis indicators (not the least of with is the MLR (Moving Linear Regression) line that give earlier sell signals than a simple MA.

* Straight Trend Lines - I've always been troubled about drawing lines on charts. The rules for drawing them seem quite arbitrary. As anyone who remembers high school geometry remembers, any 2 points constitute a straight line. So, how many points are needed? What is the minimum number of days, weeks, or months that should be covered by the chart before straight trend lines can be applied? Every time I hear/read someone offer answers to questions like that, I get a different answer.


Steven Greenfield from New York posted 9 months ago:

I find it is is easy to look back and suggest when a sell decision was correct. How about picking 5 stocks that meet your criteria today and advising us what action should be taken and then following the movement of the stocks over the next 90 days?
That would be instructive, I believe.


Robert Talambiras from New Jersey posted 9 months ago:

I fully agree with Steven Greenfield above. 20-20 hindsight may be instructive, but it is not convincing. Let's see some predictions, and publish the mistakes too!


Raymond Gundersen from California posted 9 months ago:

I have found the Ichimoku Cloud indicator most useful for making sell decisions. You can find it on Freestockcharts.com or your broker web site might have it. Research Ichimoku Cloud on Google to learn how to read it. Between 11/21/11 to 9/10/12 I had 7 potential sell signals using moving averages, MACD, and RSI on Ross Stores (ROST). Thanks to the Ichimoku Cloud it advised me not to sell and I held on for an 80% gain.


Ken from California posted 9 months ago:

Author Kahn, as useful as his remarks are, neglects to discuss volume action as a prime factor, notwithstanding his reference to "supply and demand."

Contributions from AAII members much appreciated as well.

Thank you.


Anthony Babich from Massachusetts posted 9 months ago:

It's easy to present a working hypothesis from specific archival data, and, as all disclaimers state - this is not a guarantee of future performance. What is missing in all these discussions are statistics on both the archival and follow-up results of using these hypotheses on a continuing basis. When using multiple hypotheses, must they agree, or is one better, or should you use a weighted combination? In the examples, what if you used 50 day averages (arithmetic or exponential?) instead of a trend line, or vice versa? If you are looking for speed, I would submit that both the Fast Stochastic Oscillator and MACD would be better, but you might get dizzy watching them. From an overall perspective on longer term trends I would even suggest considering Point and Figure charts. In the end, however, I think that the final decision is a subjective one. As I said above, we don't have any numbers on how good anything is - are my chances of being right 30%, 80%, or what? Finally, let's not forget that the majority of trading today is algorithmic, which doesn't necessarily follow any of these hypotheses. Experience is the best teacher?


Bob Samson from Maryland posted 8 months ago:

I avree with earlie posts basically stating that cherry picking of histotical data dies not carry much weight in this forum. Come up with deterministic rules thst can be back tested. To dste, only the shadow stock portfolio expkicitly fies thus.

It is time for AAII to begin looking at combinations of stock screens on both the buy and sell sides to complete the picture when comparing strategies.


David E. from Washington posted 8 months ago:

Some of you seem to have forgotten that market movement is a behavioral science, not a 'hard' science. So perhaps you should quit looking for concrete rules where there aren't any. These 'rules' are generalizations based on looking at past behavior suggesting patterns. Reading these patterns is an art if only b/c none of us can foretell the future.
I have great difficulty trying to determine when to sell. So I find the pattern IDs explained By Mr. Kahn above to be quite helpful. I've already bookmarked this page b/c I know I will be referring to it often as a starting point for my sell decisions.
Thanks, Mr. Kahn, for a great article. Timely, too, in today's market. Well done.


Enock Mwila from Washington posted 8 months ago:

The article from Mr. Kahn is a very useful instrument for me. It gives good information on stocks. Thank you Mr. Kahn for your educational article and please publish more of this nature.


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