Investors tend to panic when a winning growth stock plummets out of nowhere, reducing their double-digit gain to nothing. It’s hard not to feel defeated after not taking profits on a potential winning trade. But instead of ruminating on the sell-off, investors can still manage the trade successfully and protect against losses.
Knowing when to sell growth stocks can be just as important as knowing when to buy. Investors can rely on three foundational rules for selling stocks.
First Sell Rule For Growth Stocks
The first sell rule is to take profits when a stock reaches a 20% to 25% gain from its original buy point. Then, there is the 7% to 8% sell rule, which says to sell a stock once it loses 7% to 8% from the original buy point, or your purchase price.
Finally, there’s the round-trip sell rule. According to this rule, investors should sell the growth stock if it falls back near the buy point after it has made a gain of more than 10%. Try to sell before all gains are wiped away.
In some cases, a stock may even have hit the 20% profit mark, but lo and behold, the stock falls all the way back to the buy point. In this case, don’t panic over the lost gains. Instead, use the round trip-sell rule to avoid further losses.
A Round-Trip Sell Signal For Winnebago
In June of 2020, Winnebago (WGO) had a massive sell-off following the coronavirus crash in February of that year. But this provided the foundation for a deep cup-with-handle base that formed over a three-month period (1).
The stock broke out past a 61.99 buy point of a short handle on June 4 (2). Shortly after that, the stock reached a new high of 72.65 on June 23, which represented a 17% gain at the time. However, the stock started a long decline from there.
The same week Winnebago topped, on June 24, the company reported a loss, which sent the stock tumbling. By July 6, the stock sank back to its original buy point, constituting a round-trip sell signal (3). Investors should have sold even with a small profit. Certainly, they should not have waited for the stock to hit the 7% to 8% sell zone.
Indeed, in the following months, the stock continued much lower until it finally bottomed in November, well below its buy point. The stock formed a 28-week cup with handle that produced some additional gains.
This article was originally published Oct. 2, 2020 and has been updated. Follow Rachel Fox on Twitter at @foxonstocks for more market insight and commentary on growth stocks.
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