Trading 101: The Most Important Part of Any Trade
Buying a stock is the easy part. Knowing when to sell – that’s the hard part.
None of us want to part ways with a winning stock. But if you don’t have an efficient exit strategy, that winning stock could become nothing more than a dud. Far too many of us trade on emotion. We don’t want to sell our winners, fearing we’ll miss another leg up in the stock.
Unfortunately, that could easily set us up for failure and loss.
Look at Micron Technology (MU), for example.
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As the trade war with China began to cool, Micron began to recover from nearly $51 to $62 a share in weeks. That was a great return of $11 in weeks. For many, we don’t want to sell after a move like that. We want to hold, believing the stock could move even higher based on emotion.
But remember, emotion is a portfolio killer.
Instead, we want to remove that emotion. We want the decision made for us without fail. We want to jump out with profits in hand without rethinking the move.
To do so, all we want to do is watch the technical setups in the stock.
Notice what happened to Micron Technology (MU) after its $11 move higher. For one, the stock began to fail at overhead resistance dating back to November 2018. Remember, if a stock hits resistance and begins to fail, it can start to raise red flags.
Two, notice what began to happen to the momentum indicators – all became overbought.
Not only did the stock begin to fail at its upper Bollinger Band (2,20), but relative strength (RSI) pushed well above its 70-line.MACD became over-extended. Even Williams’ %R (W%R) was excessively overbought above its 20-line. Not long after, the stock began to pivot and fall.
That’s the exit point. That’s the point at which you leave your emotions at the door, and take your money off the table. History tells us the same. In fact, look at what happened to Micron Technology each time it hit its upper Band (2,20) with overbought reads on RSI, MACD, and Williams’ %R. About 80% of the time, the stock pulled back.
In short, this exit strategy is clear, and can give you reason to exit your stock without emotion.
After using this for my entry and exit points for nearly 22 years, I swear by it.
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