Buy or Sell? What Is More Important In Trading? (When To Sell A Stock)
Last Updated on April 18, 2023
When to buy and when to sell a stock determines your profit and loss. But what is more important – when to buy or when to sell? Most traders spend almost all their efforts speculating when to buy a stock. However, when to sell a stock is just as important as when to buy. In trading, when to sell a stock can be of greater significance than when to buy!
When you sell or exit a stock is just as important as when you buy the stock. In this article, we look at random buys and entries and spend all our efforts on determining the importance of when to sell or exit a stock. By the end of the article, everyone understands that when you buy a stock is not as important as they think.
Does it matter when you buy a stock?
When to buy and sell a stock are controversial topics among traders. Traders new to the market spend most of their looking for profitable setups but rarely spend much effort and time on when to sell and swing for the fences.
Most traders are always looking for better indicators and new trading tools so they can backtest more to find better strategies. But mind you, when you buy a stock matters less in your success and failure as a trader than you think.
The truth is: when you buy a stock can be done randomly and you can still manage to make a profit. How is that possible?
It’s possible because the stock market is very mean-revertive.
This means, for example, that you can enter randomly, but sell on short-term strength.
We simulate random buys and defined sales and exits
In this section, we buy stock randomly. This means we buy by tossing a coin! All entries is at the close.
The test basket is 77 different ETFs, both equity and debt/interest rates, all listed on US stock exchanges.
The idea is to sell into strength. So the first exit is to simply sell on the first day after entry when the ETF closes above yesterday’s close. The exit is on the close. Here is the equity curve:
The portfolio holds a max of 10 positions at a time. If there are more trades generated, the program picks ETFs randomly. There is a high win ratio, but the winners are a lot smaller than the losers. Still, this simple strategy generates 6,2% in annual return since 2000. There are just 2 losing years. However, this is without commissions. We’re using entry on close and that means there should be no slippage unless our orders move the market.
What happens if we exit on a close that is higher than yesterday’s close plus yesterday’s 50 days ATR (average true range)? Here is the chart:
Annual return increases slightly to 7.4%.
In other words: with a completely random entry you manage a CAGR of 7.4%, which is not bad.
Buy or sell, what should your focus be? When you sell is much more important you imagine.
The entry price is very important to make a good trade. A good entry = easier trade.
If the trigger-price is 100 and you buy at 102 – your downside is large and it’s more difficult to mentally finish the trade.
Another expierince:
I had a position in OPERA. My entry was 41, after a intraday sell-off, but the support is 40 and resistanse short term is 42.
When the stock was trading at 39,9 I was nervous. I sold the stock at 40,30. After I sold the stock was trading at 41.
My conclusion: I did some mistake, I did a entry far above support. My exit was wrong when I sold at support. Everyting was wrong, due to a too high entry.
You seem to be on a mission to prove me wrong (?). However, my main point with this article is to show that even a random entry can be quite good with the right exit.
I think that the exit is where you can make the differance, because then you already are in the trade and all sorts of psycological mysteries can hit you, panic, fear or even greed, and theese you have to overcome.
But as Oddmund points out, you need an entry before you can make an exit.
Hi, it’s one thing i been cunfused about sometimes when it comes to stop loss. It is when to use it, i mean should it be placed shortly after the trade or used in the end of the day?
Does any have any experience or know if there’s been any statistical surveys on this?
Many time myself i been entering a trade then been stop out shortly after, then see the stock rallying in the end of the day.
Thank you for great books Oddmund, i been purchasing a lot of the book you mention in the book as well. Any plans to put out a list of recommended trading books in this side?
Obviously there is no exact answer. But after having tested strategies for ten years, it’s always a trade-off between risk and long term profits. Put short, usually stop-loss detoriates a strategy. That’s my experience. Hence, I never use stop loss. Instead I trade smaller size and different strategies. Using stop-loss I almost always get stopped out at a turning point. I dislike selling when the market/stock goes down. But again, if you’re trading size and leverage, you have to put a stop in there.
Exit strategies often have a larger impact in portfolio performance compared to entries.
Imagine doing your due diligence and you come across the perfect stock with the best TA setup imaginable. All the tech indicators are green and the fundamentals show that it’s going to be strong business quarter.
You ENTER the investment accordingly and then the trade turns against you for whatever reason. Without having a sound exit strategy, this type of trade can make or break your portfolio for the year.