Cutting Losses Short Is Key For Stock Market Success

by | Feb 15, 2008 | Asset Management, Point and Figure

Most Wall Street recommendations to buy are based on projected future revenues and/or projected future earnings. Projected. Or you could say, “predicted”.

Ever notice that a stock will begin to drop (many times without any news), and people will begin to ask “why is XYZ dropping?” Then rumors begin to swirl that something might be wrong, and the stock drops even further. In fact, it slides quite a bit until the actual news is released.

And by then, it’s often TOO late to sell the stock.

This makes some folks jumpy…and with good reason. I’m sure you know someone who makes a point or two in a stock and then flips it. Why is it that some folks just seem so thirsty for a profit? Probably because they rarely make money in stocks. And yet, these same folks will ride XYZ down 50% because “it’s not a loss until you sell it.”

Yeah, right! People in my line of work always preach cutting your losses short and let the winners run. The problem is most folks don’t know whether to sell — or hold on, and they wind up making a mistake.

Look, this is where the charts can give you guidance. They don’t predict the future, they just tell you if a mutual or a stock is fund is going down because of the stock market or because there is something actually wrong.

If a fund or stock is in a strong sector, has good relative strength compared to it’s peers and the market overall, and is on a buy signal…then stick it out. If a mutual fund or your stock is giving multiple sell signals, breaks the support line, is on a relative strength sell signal, then it’s a loser, and it’s time to go.

Point and figure lets you know if the move today in your stock was just a wiggle with the rest of the stock market, or a change in trend. And trends REALLY matter. And the charts don’t care if there was a big seller of shares, or if someone has inside information about the company.

When enough sellers show up to change the trend of the stock (from a stock in demand to a stock that everyone is selling — supply), we will see that very plainly on the chart. Plain as the nose on your face. These point and figure charts are unbiased – they do not care if you have owned XYZ for 44 days or 44 years – when it’s time to go, it is time to GO.

The charts are very clear. There’s no ambiguity. Buy, sell, or hold on. Simple.

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