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Are there any rules of thumb for when to 'walk with your chips' and realize gains made on stock?

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    Every single stock there is may "drop in price." Is the reason you bought the shares no longer valid? Aug 27 '16 at 19:07
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    This is not a rationale question. How would anyone know? We don't even know what stock you are talking about, much less what might happen to the value of that stock in the future. I guess one could advise you to sell the shares based on the reasoning that you would probably be wise not to be investing in the stock market at all. Aug 27 '16 at 21:19
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    I am talking about general rules, not a specific stock. Aug 27 '16 at 22:31
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    The original question "Is it a good idea to cash in the gains in a share value e.g. the share value now minus what I originally paid for the shares if I think that there is a chance that the shares may drop in price?" has been completely changed. Which makes the comments initially posted a bit out of place. Aug 28 '16 at 2:39
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    It's a good question with answers that cover multiple books, maybe multiple libraries, if you want something complete enough to act on. That makes it not a good Stack Exchange question.
    – keshlam
    Aug 28 '16 at 16:19
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The only general rule is "If you would buy the stock at its current price, hold and possibly buy. If you wouldn't, sell and buy something you believe in more strongly."

Note that this rule applies no matter what the stock is doing. And that it leaves out the hard work of evaluating the stock and making those decisions.

If you don't know how to do that evaluation to your own satisfaction, you probably shouldn't be buying individual stocks. Which is why I stick with index funds.

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You should know when to sell your shares before you buy them. This is most easily done by placing a stop loss conditional order at the same time you place your buy order.

There are many ways to determine at what level to place your stop losses at. The easiest is to place a trailing stop loss at a percentage below the highest close price, so as the price reaches new highs the trailing stop will rise. If looking for short to medium term gains you might place your trailing stop at 10% below the highest close, whilst if you were looking for more longer term gains you should probably place a 20% trailing stop.

Another way to place your stops for short to medium term gains is to keep moving your trailing stop up to just below the last trough in an existing uptrend.

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    +1 for a good technician's view. I'm afraid there are stocks that are more volatile than this rule allows, and short term moves would sell one out of a position they should otherwise keep long term. Aug 28 '16 at 15:17
  • @JoeTaxpayer - that should for part of someone's trading plan and be known before any purchase is made. For my shorter term trading I choose not to trade very volatile stocks that gap a lot and I look for momentum runs, where a stock might run up over a few days or weeks and then slows down or retreats. For my longer term trading/investing I look for longer term trends that might last months and years. That is the reason for the different % used for stop losses. You need to know what your aim and purpose is before you go into a trade.
    – Victor
    Aug 28 '16 at 22:41
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In a perfect world of random stock returns (with a drift) there is no reason to "take profit" by exiting a position because there is no reason to think price appreciation will be followed by decline.

In our imperfect world, there are many rules of thumb that occasionally work but if any one of them works consistently over a long period of time, everyone starts to practice that rule and then it stops working. Therefore, there are no such rules of thumb that work reliably and consistently over long periods of time and are expected to continue doing so. Finding such a rule is and always has been a moving target.

The rational, consistently sensible reasons to sell a stock are:

  1. To rebalance a portfolio toward optimal weights
  2. To lock in gains (or losses) for tax purposes (e.g., gains in a year when your tax rate is low or losses when your tax rate is higher).
  3. To cash in so you can spend your money on consumption or real (non-financial) investments.

These rules are very different from my interpretation of the "walk with your chips" behavior mentioned in your question.

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How about this rule?

Sell 10% of your shares every time they double in price.

(of course, only buy stocks that repeatedly double in price)

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  • Well, it's a rule. Not necessarily the best rule. Not necessarily the worst rule. Unless you can explain why following this rule produces good results, demonstrated by back-testing against historical stock behaviors or explaining why that history isn't relevant, I don't think there's much more to be said about it. (And, as you said, it assumes you can predict which stocks will eventually double in price. Preferably at least as quickly as the market average does.)
    – keshlam
    Aug 28 '16 at 19:14
  • I would go a bit further and say sell half your position if the price increases considerably in a short period, say 30% in one day. Because after such a large rise in such a short period the stock has most probably overshot and could possibly see some retreat in the following days. No one ever went broke by taking a profit.
    – Victor
    Aug 28 '16 at 22:48

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