Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 16

Selling Buy and Hold

One owner of a school franchise that teaches people how to day-trade stocks says that the flaw with buy and hold is that no one knows when to sell. Does buy and hold really mean hold forever, or does it really mean buy and wait?

The complaint of not knowing when to sell applies to position trading, swing trading, and day trading as well. This chapter provides several techniques that help an investor decide when it is time to sell a long-term holding.

THE WEINSTEIN SETUP

Stan Weinstein (McGraw-Hill, 1988) describes four stages that price takes during its lifetime. The book provides an excellent tutorial on how to use the four stages along with a 30-week simple moving average to time the trades.

I show an example of the various stages labeled 1 through 4 in Figure 16.1, including an idealized pattern of the stages in the inset.

Figure 16.1 A 30-week moving average helps determine trend, entry, and exit points as price moves along the four stages.

Weinstein calls stage 1 the basing area. The ideal setup comes in two flavors. The first is when price moves horizontally and volume shrinks until late in the stage. The 30-week simple moving average flattens out with price bobbing above and below the moving average like a cork on water. This sideways movement can last from months to years, according to Weinstein. Look for stocks with little overhead resistance ...