Q & A – With CANSLIM Investing Today, When Should You Sell Winners?

I received an email question recently which is a great post topic. The question:

“Hi BLAIN,
I buy a CANSLIM stock it breaks out & doesn’t quite go to 20% then a minor market correction starts (IBD). Do I get out? How can I make those big 100% gains if I’m constantly hopping out?” – Harold

First off, for those who may not know the CANSLIM style of trading, it is one of the most popular investing strategies. Created by William O’Neil who has written many fantastic investing books, the strategy revolves around three main steps:

  1. Follow the overall market trend, buy when it is going up (3 out of 4 stocks follow the market).
  2. Search within the best industry groups and narrow to the top stocks within each group fundamentally and technically.
  3. Control your asset allocation and buy the best stocks when they break out. Use a 8% stop loss.

William O’Neil promotes selling stocks once they reach a 20% return. However, if they move up more than 20% in under 4 weeks, Mr. Oneil will hold them for longer because these are the potential “big winners”. Check out these 60 stock tips for success.

Where Harold is getting caught up is when he sees his stocks moving up the the market turns and they reverse on him. Should he sell then or hold? Harold is not alone. In today’s market, volatility is so extreme and market action so unpredictable that it is extremely tough to capture those big winners. And truth be told, many do not if they are trading a disciplined strategy in this market.

I can only think of several instant winners off the top of my head that were “to the moon” type stocks without too much see-saw action. Chipotle (CMG), Sina Corporation (SINA), and Netflix (NFLX). NFLX is a stretch but the stock did have a pretty consistent run throughout 2010.

Chipotle CMG

In my recent post, 6 great tips for investing in an uncertain market, I mentioned that the key to success in this current market environment is controlling risk and staying disciplined. This is my answer for Harold’s dilemma as well.

It may be frustrating right now, and you may feel like all your positions are being stopped out or knocked out early. The reality is, that is exactly what is happening. You are not alone!

Looking at my personal results so far in 2011, I have yet to have one of my winning trades in 2011 break a 20% return without me being stopped out (I raise my stops as the stock increases) or me selling to lock in profits due to worsening market conditions. Heck, I’ve sat most of the year out on the sidelines in cash.

Overall though, the key is to keep moving forward. Don’t be afraid to take profits early and often, and keep stops very tight on new positions. Stick to your strategy which should include a disciplined profit vs loss ratio. In the long run, this market will change. You will succeed Harold if you follow your rules, keep at it!

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