Sunday, April 29, 2012

The when-to-sell decision

The when-to-sell decision has always been more difficult than the when-to-buy decision because the decision to buy only needs two conditions. We need to have the free cash and we need to have a compelling story. The when-to-sell decision has always been a historical nightmare for both professional and private investors because there are too many moving parts to consider. We have the micro or bottom up worries such as the compelling storey that has suddenly gone sour. Perhaps some chart pattern has negative implications. We also have the emotional baggage that compels us to sell a winner too soon and to hold on to a loser too long.

We also have the macro or top down worries such as the current crisis be it the never ending Euro-Zone problems or the threat of a slowing Chinese economy. Now we have the mindless chirping of the seasonal “sell” crowd pressuring investors into switching a good portion of their equity portfolios to cash.

The root of the problem is the failure to have an exit strategy in place at the time of the decision to buy. The exit strategy or stop loss option should never be based on changing fundamentals, otherwise known as the “compelling story” because the price decline will often lead the deteriorating business model. I am sure long tem investors in the shares of Nortel Networks Corporation or Research In Motion Limited would agree with this observation

The Lowest 26-Week Low is a simple strategy with no math required. Set your stop at the lowest low of the past twenty six weeks. This is a moving 26-week window, so each week add the new week and drop the oldest week. Sell if the weekly price closes below the prior lowest 26-week low. Conversely, if the price is rising the lowest 26-week low will follow the stock upward which allows us to hold a rising stock in some cases for weeks, months or years.

Our chart this week is that of the weekly closes of Research In Motion plotted above the lowest 26-week low price channel. Note the numerous price declines below the 26-week price channel trough 2010 and 2011. No excuses for big losses here.


mino.v said...

Bill ,what about the true range formula you have published in the past? How does this compare/

mino.v said...

Bill, what about the true range formula that you have published previously? How does this compare?