Knowing when to sell a penny stock is an overlooked aspect of day trading. The ultimate decision to sell a penny decides if you will profit or lose from the trade. Selling too early can be the worst feeling in the world, watching your stock climb higher. Thinking to yourself, if I only had the balls to hold on longer, I would have made money. On the other hand selling and watching the share price drop, gives you that feeling of relief. 90% of traders fail because they don’t know when to sell because they aren’t a strategy.
Before you make the final decision to sell, a number of factors must be considered. In my opinion the best way to sell is by scaling out of your position. By doing so, I find it helps reduce your stress levels. For example if you own $20,000 worth of a stock and it goes up over 50-100%, it would be wise to sell half or maybe three quarters of your shares and let the rest ride. If the share price continues to ride higher you will have captured some of the upside gains and will feel less guilty then if you had sold all at once.
Consider these indicators when deciding to sell or hold onto a stock:
- How high is your risk tolerance? Can you handle much pain?
- Are there better investment opportunities elsewhere?
- Risk to reward ratio.
- You may need the money for something else.
1. Technical Trends of a Stock
Is the stock price in an upward, downward or sideways trend? An uptrend means that a company has 2 or 3 up days for every down day. This would mean the price would move higher month after month. Some trends can last months other days. By buying early into a strong upward trend, you can profit significantly. To eliminate risk, only buy when it is clear the stock is trending upwards. Once the trend is over, it’s time to sell your position.
Once a stock’s uptrend or downtrend is over it can start trading erratically, giving you less of a chance of profiting from future price movements. It’s common for a trend to reverse. Learning to find trend reversals can be extremely profitable. To help spot a trend reversal before the crowd, look out for the momentum and trading activity of the stock. The most important trend reversal patterns are the topping out and bottoming out patterns.
Support and Resistance levels tend to hold at round numbers like $1.00, $1.50, $2.00. This is a tip I learned from legendary investor Jesse Livermore. This tends to happen because investors tell their brokers to buy or sell at nice round numbers. Volume tends to increase when share prices approach support levels. Buying pressure increases at these levels and will potentially keep the price over support. Also support levels can fail, which can take out stop losses causing a sharp stock decline. Several support levels may exist for a single stock, but each support levels can be weak, strong or moderate. Generally when a stock falls below support, it can become resistance.
These are caused by an increase in selling activity at a particular price, making it harder for it to rise above a certain level. Resistance levels can be a great place to take profits.
2. The Reason why you Bought the Stock
Does the reason why you bought the shares still apply? Has the company’s prospects improved? If the company’s growth is too slow, its profit margin is decreasing, debt is increasing or it is not executing its business model, it may be time to sell.
3. Volume of shares traded (Trading Activity)
Increases in trading activity is usually positive for penny stocks, unless there is a major sell off. High trading activity could mean the penny stock is getting a lot of exposure. If volume of shares traded is decreasing or non-existent, this would be cause for concern and you may have difficulty selling your shares. Judging whether a stock has high or low trading activity comes down following historical trading volumes.