Sell Rules: Using Stochastics To Take Profits

TL;DR

Stochastics can help identify profit-taking points by showing a stock’s momentum and whether it may be overbought or oversold. A reading above 80 suggests the stock has made a good move and may be extended, while reversals, weak closes, and price-indicator divergences add context. The Nucor example shows how these signals informed trimming a position after a move from about $82 to above $100. Read on for the full sell-rule framework.

Transcript

[Applause] last week i talked about buying correctly solves a lot of your problems because if you buy the stock coming out of a really nice base and you buy it exactly right then you know where your stop point is you can look at the stock technically and if it breaks down below that really tight action then you know where where to sell and you can ... Read More

Key Insights

• 😥 Buying stocks correctly, particularly those in a strong uptrend, can help minimize losses and set clear stop-points.
• 📶 Selling into strength can be done by considering the stock's historical performance, industry strength, and the duration of the current bull market.
• 💁 Stochastics can provide valuable information about a stock's momentum and overbought/oversold conditions.
• 🚕 Tax implications should not drive selling decisions, but rather, focus on the stock's price action and overall trend.
• 🆘 Learning and understanding technical indicators can complement fundamental analysis and help make more informed trading decisions.
• 🍉 Selling strategies can be adapted based on individual trading goals, whether for short-term gains or long-term investment.
• 😥 Using historical price and volume data can help identify potential buying and selling points in stocks.

Questions & Answers

Q: How can you use stochastics to take profits?

Stochastics show momentum and can indicate when a stock is overbought or oversold. When the reading rises above 80, the stock may be extended after a good move, so the speaker looks for confirming signs such as a price reversal, stalling action, or a close in the lower half of the day’s range.

Q: What does a stochastic reading above 80 mean?

A reading above 80 indicates that the stock has made a good move and is probably extended. It is not presented as a standalone sell command; the speaker also examines the stock’s price action for reversals or signs that momentum is rolling over.

Q: What price action can confirm a potential sell signal?

The speaker looks for a stock that trades higher but closes lower on the day, or one that suddenly stalls after moving up well. Another warning is when most trading occurs lower in the daily range and the stock closes in the range’s lower half.

Q: What are the three ways to sell a stock as it moves up?

The three approaches are selling from the initial buy, selling into strength, and selling into weakness. The discussion concentrates on selling into strength while considering the stock’s history, trend, industry group, and the age of the bull market.

Q: What factors should be considered when selling into strength?

Consider how long the stock has been in an uptrend, how far it has moved, and what kind of moves it produced in the past. The speaker also checks the strength of its industry group and how long the broader bull market has been running.

Q: How does buying correctly help control losses?

Buying as a stock breaks out of a tight, well-formed base makes the stop point easier to identify. If the stock then breaks below that tight action, it can be sold before reaching an 8% loss, potentially keeping the loss smaller.

Q: How did the speaker take profits in Nucor?

Nucor broke out near $82 and later moved above $100. Although the speaker liked it as a longer-term holding, he took roughly half the position off after that rise and later reduced it to about a quarter-position when another advance failed and a new base formed.

Q: What did the Nucor price and stochastic divergence suggest?

As Nucor fell toward the high $80s, its trading volume dried up and remained below average daily volume for several weeks. While the stock was making lows, the stochastics were making higher highs, suggesting that the selling was not as severe as the price action appeared.

Summary & Key Takeaways

• Properly buying stocks that are in a strong uptrend and breaking out of a base can help minimize losses and determine stop-points.

• Selling strategies include selling off the initial buy, selling into strength, or selling into weakness depending on the stock's recent performance and the overall trend of the market.

• Technical indicators like stochastics can provide insights into a stock's momentum and overbought/oversold conditions.