When Should You Sell Stocks? Strategy Analysis and Sharing

In the world of stock investment, the question of “when to sell” often tests an investor’s wisdom more than “when to buy”.

Countless people have found themselves torn between “taking profits while they’re ahead” when in profit, or struggling with the decision of “cutting losses and exiting the market” when in loss.

As the investment guru Peter Lynch once said, the difficulty of the selling decision lies in the fact that it requires not only rational analysis but also the ability to overcome the greed and fear deeply rooted in human nature.

Why Is Selling Difficult?

Newcomers to the stock market often make a common mistake: they know they should sell, but they find it hard to take action. As a result, their losses keep growing, and they end up regretting their inaction.

Becoming More Persistent as Losses Mount

When the stock price drops after buying, many people stubbornly think, “I’ve already lost so much. If I sell now, I’ll really be at a loss.” So, they choose to hold onto the stocks or even add to their positions.

This behavior stems from regarding the invested funds as “sunk costs” and mistakenly tying past expenditures to future decisions.

In reality, such an approach often leads to an expansion of losses. Psychological research shows that excessive concern about sunk costs can cause people to overlook the true value of their current holdings. The core of investment should be “whether it’s worth holding now”, rather than “how much was invested in the past”.

The Misleading Anchoring Effect

The anchoring effect can make investors obsessed with the purchase price or a previous high price of a stock.

For example, someone buys a stock at 100 yuan. When the price rises to 120 yuan, they don’t sell. When it drops back to 110 yuan, they keep expecting to “sell when it goes back to 120 yuan”. Eventually, they are forced to cut their losses when the price falls to 90 yuan.

This phenomenon reflects the brain’s dependence on the initial price, causing your decision-making to deviate from the actual market trend.

Experienced investors can break free from this mindset and instead focus on the driving factors behind the stock price changes, such as whether there are changes in the company’s fundamentals or new developments in the industry trend. These are the key factors that determine whether you should sell or not.

Gaining Little but Losing Big

Behavioral finance reveals an interesting phenomenon: investors are much more likely to sell profitable stocks than loss-making stocks.

This tendency stems from people’s innate risk aversion. When in profit, they are eager to lock in their gains, while when in loss, they hold onto the hope that the situation will turn around.

However, the harsh reality of the market is that profitable stocks may decline at any time if they lose their growth momentum, and loss-making stocks will continue to depreciate if their fundamentals deteriorate further.

Core Strategies for Scientific Selling: A Full Dimensional Coverage from Stop Loss to Take Profit

Cutting Losses: Discipline to Combat Emotions with Rationality

William O’Neil proposed the 7%-8% stop loss rule in his book “How to Make Money in Stocks”. Through his research on the history of U.S. stocks over 130 years, he found that if the stock price drops by more than 8% from the “ideal buying point”, it often means that the entry timing was wrong or the target stock was incorrectly selected.

In such a situation, the probability of winning by stopping the loss in a timely manner is much higher than continuing to hold the stock. The 7%-8% stop loss rule is mainly applicable to trend investment and short-term trading, especially for stocks with large volatility. Its core is to avoid unforeseeable future risks by controlling small losses.

For medium and long-term investors, a rigid fixed percentage stop loss set in advance may be triggered by a sudden short-term sharp fluctuation at any time, resulting in missing long-term opportunities.

In this case, it is recommended to use the dynamic stop loss method. For example, taking the 50-day moving average as the trend dividing line - when the stock price effectively breaks below this moving average (such as closing below the moving average for three consecutive days), it is regarded as a signal of a weakening trend, triggering an exit. In 2023, after the leading liquor stock broke below the 50-day moving average, it continued to adjust. Investors who exited in a timely manner avoided an additional 20% decline, while those who held on suffered greater losses.

The key to dynamic stop loss lies in combining the characteristics of individual stocks and the market trend to find a balance between risk control and the patience to hold the position.

Designing Profits: Taking Profit Is Not the End but the Beginning

Target Taking Profit: Setting a “Reasonable Anchor Point” for Profits

Setting a target for taking profit according to the characteristics of individual stocks is a common strategy. Value stocks usually have low volatility, and a profit target of 15%-20% can be set; growth stocks have greater flexibility, and the take profit level can be set at 30%-50%.

For example, investors who bought Tencent in 2021 could have avoided the subsequent halving of the stock price caused by antitrust policies if they had exited when the stock price reached the 30% target (corresponding to 195 yuan).

The core of target taking profit is “not to be overly greedy for the extreme”. Accept that it’s impossible to sell at the highest point every time. Instead, through disciplined operations, lock in the profits.

Dynamic Taking Profit: Letting Profits Follow the Trend

Another more flexible method is dynamic taking profit, which means continuously moving up the stop loss level as the stock price rises, locking in part of the profit while leaving enough room for the stock price to rise.

For example, if a stock bought at 100 yuan rises to 120 yuan, adjust the stop loss level to 115 yuan (cost price + 15%). If the stock price drops back to 115 yuan, sell it and lock in a 15% profit; if it continues to rise to 130 yuan, raise the stop loss level to 123 yuan accordingly.

This method is particularly suitable for stocks in an upward trend. It can avoid the situation of “going up and down like taking an elevator” and allow you to enjoy profit growth while the trend continues. In essence, it makes the profitable position a tool for risk control.

Fundamental Changes

Many investors, believing in “long-term investment”, often ignore changes in the fundamentals and eventually fall into the “value trap”. When the company shows the following signals, you should decisively sell the stock even if the price decline is not significant:

• Continuous Deterioration of Performance: The net profit in two consecutive quarters has declined by more than 20% year-on-year without a reasonable explanation. For example, due to backward battery technology, a new energy vehicle company saw a sharp drop in orders, and its stock price plummeted by 40% after the financial report was released.
• Disappearance of the Moat: The core competitive advantage has been subverted. For example, after the popularization of smartphones, the stock price of Kodak, a giant in the traditional digital camera industry, dropped from 100 dollars to 1 dollar. The fundamental reason was the collapse of the technological barrier.
• Management Risks: Ethical issues such as financial fraud and insider trading. For example, investors who exited in a timely manner before the Luckin Coffee incident avoided more than 90% of the losses.

To determine whether the fundamentals have deteriorated, you can quickly check through the “Three Questions Method”: Has the industry ceiling dropped? Is the company’s gross profit margin continuously shrinking? Can the cash flow support future development? If most of the answers are negative, you should decisively cut the losses regardless of the cost price.

Technical Breakdown

The stock price trend is a comprehensive reflection of market sentiment. When there are signals of a technical breakdown, it is often a precursor to a trend reversal:

• Failure of Key Support: Breaking below the long-term upward trend line, the previous low price, or the neckline position (such as the neckline of a head and shoulders top or a double top pattern) means the defeat of the bullish forces. After an AI chip stock broke below the six-month upward trend line in 2024, it plummeted by 40% within just two weeks.
• Warning of Volume-Price Divergence: When the stock price reaches a new high but the trading volume shrinks (price rising while volume shrinking), it indicates that the momentum for chasing the rise is insufficient, and the stock may reach its peak. When the trading volume increases during a decline (price falling while volume increasing), it is a signal that panic selling is taking place, and it is difficult for the stock to rebound in the short term.

The core of technical analysis is not to predict the future but to identify changes in the current trend, helping investors react before the market sentiment reverses.

Observing the Cycle

The stock market is constantly swinging between greed and fear. Selling according to the cycle rules can often achieve twice the result with half the effort:

Judgment by Sentiment Indicators: When the number of retail investor accounts reaches a historical high, the issuance of funds is booming, and the median price-to-earnings ratio of individual stocks breaks through historical extremes (such as the greed index > 90), it indicates that the market has entered an overheated stage. At this time, selling in the opposite direction can avoid being the last one to bear the brunt.

Economic Cycle Mismatch: Different industries have different sensitivities to the economic cycle. High-valued growth stocks are prone to valuation corrections during the recession period, and cyclical stocks peak due to overcapacity during the overheating period. For example, before the global commodity price plummeted in 2022, cyclical stocks generally peaked six months in advance. Exiting the market at this time could avoid the main downward trend.

What to Do If the Stock Price Continues to Rise After Selling?

Almost all investors have experienced the regret of “selling too early”. However, mature investors view stop loss and take profit as a probability game.

William O’Neil’s statistics show that although the 7%-8% stop loss method may miss 20% of the “bull stocks”, it can avoid 80% of significant losses.

If the stock price continues to rise after selling and the fundamentals remain unchanged, you can buy it back when it retraces to an important moving average (such as the 20-day moving average). This is not about correcting a mistake but about establishing a “secondary confirmation” trading system. There are always opportunities in the market, and the key is to stay rational and not be swayed by emotions.

Should You Sell Immediately or Wait and See When Facing Sudden Bad News?

Dealing with sudden news needs to be done according to different situations:

• Anticipated Risks (such as a decline in the earnings forecast): Execute according to the established stop loss rules and do not change the strategy temporarily due to the good or bad nature of the news.
• Sudden Bad News (such as sudden policy changes, black swan events): Sell within 15 minutes after the market opens. At this time, the liquidity is relatively good, and you can avoid the situation of being unable to exit due to a subsequent daily limit down.
• Short-term Shocks That Do Not Change the Long-term Logic (such as a short-term plunge of a leading consumer stock due to the epidemic): You can set an observation period of five trading days. If the stock price can regain the key support level, it indicates that the negative news has been digested by the market, and you can continue to hold the stock.

Is Stop Loss Necessary for Long-term Investment?

The prerequisite for long-term investment is that “the company’s fundamentals remain excellent continuously”. If the purchase price is reasonable and the competitiveness remains unchanged, there is no need to stop the loss for short-term fluctuations (for example, Buffett has held Coca-Cola for 30 years and experienced many 20% pullbacks).

However, long-term investment does not mean “holding on stubbornly”. If you are deeply trapped due to a too high purchase price or the company’s fundamentals deteriorate, you still need to stop the loss according to the rules. True long-termism is to maintain patience with high-quality targets based on in-depth research, rather than being stubborn about wrong decisions.

Building a Personalized Selling System: The Progressive Path from Imitation to Internalization

Clarify Your Investment Positioning

• Value Investment: Use “valuation bubble” (such as the P/E ratio exceeding the historical 90th percentile) or “fundamental deterioration” as the selling signal, and pay more attention to changes in the intrinsic value of the enterprise.
• Trend Investment: Rely on technical breakdown signals (such as breaking below key moving averages, pattern reversals), and focus on changes in market sentiment and capital flows.
• Event-driven Investment: Use “catalyst realization” (such as the completion of a restructuring, the release of an earnings forecast) as the take profit and stop loss points, and promptly evaluate the expected difference after the event occurs.

Quantify Your Risk Tolerance

Calculating the “maximum acceptable loss per transaction” is crucial.

For example, if the principal is 100,000 yuan and the risk tolerance is 10%, the stop loss amount for each transaction should not exceed 10,000 yuan. Suppose a stock is currently priced at 10 yuan, and the stop loss level is set at 8% (9.2 yuan), then you can buy at most 1,250 shares (10,000 yuan ÷ 0.8 yuan).

In this way, by combining the stop loss rules with position management, you can ensure that a single loss will not damage the foundation of the principal.

Conclusion

The ultimate battlefield of stock investment is not on the candlestick chart but in the investor’s heart.

Learning to sell essentially means learning to reconcile with human nature: accepting that you cannot predict the market, acknowledging that every transaction has the possibility of making mistakes, and then using rules to build a moat to protect yourself.

Whether it is the 7%-8% stop loss discipline or the value-based adherence to fundamentals, the core lies in establishing a selling system that is “suitable for oneself, can be repeatedly verified, and can resist emotions”.

Finally, please remember: there is no perfect selling timing, only selling actions that conform to the rules. When you can calmly accept the regret of “occasionally selling too early” and decisively execute the discipline of “cutting when necessary”, you have completed the transformation from being emotional to being rational. The market is always full of changes, but a mature selling strategy can enable you to retain the capital to re-enter the market when a storm comes and have the confidence to take decisive action when an opportunity arises.

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How about writing down the selling conditions for your stocks now? Is it breaking below a certain moving average? Or reaching a certain valuation target? Stick the conditions next to the screen. When making the next transaction, let rationality replace emotions in making decisions. This small step will be the starting point for you to move towards stable profitability.