Last time we introduced a 7%-10% stop loss strategy, the purpose of which is to let investors learn to stop the bleeding when stocks lose and avoid widening losses.

But some investors may be asking, if stocks rise and start to be profitable, when to sell?

In this article, we will introduce you to another way to sell stocks: a 20-25% stop profit strategy.

Why Stop Profiting

In the stock market, it is important to learn how to stop taking profits. The purpose of stopping profits is to lock in profits and put them in a safe position so as not to throw back profits in subsequent stock falls.

As a fictional example, Cici is a short-term trader who has been following the NFLX for a long time, and she wants to find a reasonable place to buy. She found that the Nefei share price had gone out of a rectangular box for a while, and the price broke above the trend line, judging that it could be higher in the future, and bought at $263 the next day after the breakout.

Nefei's share price certainly rose along the way, rising to $305.6 in less than a few days, up 16%. Cici was delighted and felt that Nefei could rise again, so chose to hold on.

But the outlook was short, with the stock price experiencing a series of eight consecutive falls, not only losing profits, but also a small loss. Cici ended up clearing the stock at $255, losing 3% due to fears that the share price would continue to fall.

Cici has no regrets. If she had sold early, she would have made a profit of 16% instead of a loss of 3%. From this she realized the importance of making a profit.

20%-25% stop profit strategy?

Stop taking is selling when the price rises to a profit point.

In the stock market, there are many ways to stop making a profit. As with stop loss, a fixed percentage method can be used to stop profit. (English: profit taking at a specific percentage)。

The fixed percentage stop loss method is to set a fixed percentage number, such as 10%, 15%, or 20%, as the profit point. As soon as this percentage increases, you sell the stock for a profit, and the bag is safe.

The question is, how much better should this percentage be set? William O'Neill, author of The Laughing Stock Market, gives his take-profit strategy:

When the stock price rises between 20% and 25% from the ideal buy point, you can consider selling.

For example, Cici considers Company A to be a reasonable buy point at $100 and follows a 20%-25% stop trading strategy. When the share price rises to the $120 to $125 range, Cici may choose to stop and sell.

• Advantages: Reduces the influence of emotions on decisions, simple to understand, easy to operate.

• Cons: If stocks continue to rise, they will miss subsequent gains.

Why 20%-25%?

William O'Neill's long-term research has found that most stocks, especially growth stocks, tend to rise by about 20-25% after breaking through chart patterns, before retracting significantly into the stock market.

Therefore, he believes that investors should watch profits fall with their eyes open, rather than lock in profits before retracting.

Some investors may feel that earning 20%-25% is not much, but the benefit of doing so is that investors can reinvest their cash into a new target, making the snowball even bigger.

How is it applied in real combat?

The profit stop strategy of 20%-25% is calculated based on a reasonable buy point.

In an actual trade, after a share price has been breached, a trader may not be able to buy a stock at a reasonable buy point price, so it can be divided into a fair buy point and an actual buy point.

Let's say you think the reasonable buy point is $100, but in the actual transaction, you buy at a price of 102.

So according to the 20%-25% drawdown strategy, your drawdown zone is still $120-125 calculated at a reasonable buy point instead of $122.4-127.5 calculated at the actual buy point.

Therefore, if the stock price rises to the profit zone, your actual profit is actually only 17.65%-22.55%.

Back to the example of just Cici. The actual price of buying Nai from Cici is $263. And based on the characteristics of the rectangle shape, the fair buy point for Nefei should be at $252 above the pressure level above the rectangle, so the breakout price zone should be between $302-315.

If Cici had developed a stop strategy of 20%-25% before trading, she would have sold the stock at $302 and her yield would have been 14.8%.

What to do if stocks continue to rise after a profit stops?

You may be asking, what if stocks continue to rise after they stop profiting?

At this time, investors can take advantage of the approach of position management to deal with potential upside risks.

• If you feel the market momentum is good, then when you trigger a profit point, you can choose to sell a half or a third of the position, first lock in a portion of the profit and leave a portion to enjoy future gains.

• If you feel that the market momentum is not working, then when you trigger a profit point, you can opt for a liquidation to ensure that profits are safe in the pocket.

Of course, it also depends on what type of investor you are.

If you are a trend trader or a volatility trader, setting stop profit and stop loss levels in advance and strictly follow the trading plan is the key to success.

If you're a value investor, then you might end up buying a stock and holding it for a long period of time for high returns, which requires you to understand the company's business model and have a lot of patience.

summed

Selling stocks is an art.

When to sell stocks is more important than when to buy stocks. Because once an investor buys a stock, he has to decide whether to hold or sell it.

The 20-25% stop profit strategy provides investors with an effective idea to sell stocks.

However, other stop-loss strategies are also popular in the stock market, and investors should choose the appropriate option based on their situation.