Figuring out when to sell a losing stock position is a difficult task for most investors.
Take a visit to any message board covering a big loser and you'll see tons of complains about massive losses and getting crushed by bad luck.
It's happened to all of us but I'll share with you what I personally do when a stock position goes against me.
Two Types of Positions: Short Term Trades & Long Term Investments
Before you buy a stock, make sure you properly categorize what kind of strategy you plant to use.
Personally, I'm either buying a stock for a long term hold (at least 1 year) or because I believe I can profit in the short term for quick increase in share price.
Let's breakdown each strategy using seperate rules:
Short Term stock positions – Sell after 5%+ losses
If a short term trades turns against me then I get out of the stock as soon as possible. Short term trades can go against you quickly so use stop loss orders if you cannot monitor the stock during trading hours.
The reason is you don't want to rationalize a short term trade into a potential long term investment.
What's worse is you continue to hold the stock and hope that it recovers.
There is an abundance of stocks to buy so why hope and pray for a loser?
Cut losses quickly and move on to the next trade.
Long Term Stock Positions – Hold & Average Down
If I plan to hold the stock for more than 1 year then I gladly welcome lower stock prices.
Cheaper prices means I can average down my position and acquire more shares at a much cheaper price.
If I'm right about the company then the stock will recover its losses once positive news & earnings increase buying interest in the stock.
Averagaing down is a powerful strategy if you buy a stock that continues to lose but has strong long term potential.
For most investors, you are better off exiting the position and avoiding the emotional pain of watching your portfolio balance continue to drop.
The reason is most investors use a herd mentality when it comes to buying stocks.
People become interest when other investors get interested, which leads to buying at the top and potentially overpaying for your shares.
Use metrics like the 52 week high & low, 20 day moving average, and even intraday low & high to acquire your shares cheaper so you aren't suffering from major losses.
Don't let 1 or 2 bad trades blow up your portfolio. Cutting your losers and ride your winners unless you plan to hold for the long run.