Buy, Hold, and Sell!

Chapter 21Sell Strategy Pros and Cons

Sell strategies are necessary, but they're not perfect. They can save you from enormous losses, but like any strategy, they have their pros and cons.

The previous chapter showed you one of the disadvantages. You can't just set up a sell strategy and forget all about it. You need to keep an eye on the market and the news, so that you can override your sell strategy if a drop is event driven.

False Alarms

Sell strategies can also produce “false alarms,” that is, they will occasionally predict a bear market that does not happen. During a false alarm, the market goes down, crosses underneath its moving average, and triggers a sell. Then it bounces back quickly (an event-driven drop, perhaps), crosses above its moving average, and prompts a buy. When this occurs, you miss out on any gains you could have had from rising stocks because you sold before the rebound.

The reverse scenario can cost you, too. If the market rises quickly and triggers a buy, then drops enough that it goes below your sell point, your buy will be higher than your sell, and you will have lost money in that trade. You'll have been whipsawed.

I view those two disadvantages as small worries. If you make less than you might have, that's okay in my book because I believe the reason to use a sell strategy is to avoid massive losses in bear markets, especially ones like those that occurred in 1929, 1974, 2000, and 2008. I consider the fact that you don't perform as well when this ...