Should a sharp drop of a share trigger a sell action?

Question

Hi everybody,

several analytical methods in trading stocks, trigger a buy/sell signal according to moving averages. One trigger would be to sell a stock if it fell below a certain value limit. So far so good.

So I was wondering: should one react on a selling condition if a share one holds suffers a sudden high loss due to extreme changes in stock markets all over the world?
An example would be the last mini-crash caused by the stock market in china – markets all over the world fell sharply, a thing that brought some of my stocks under the limit I set as a sell trigger. But the fall of the stock markets was a kind of value-correction and didn't really represent the start of a bull market or further bad news (or so I hope...).

My 'algorithm' says that I should NOT sell my stocks in such cases since they are global and are not directly connected to the state and situation of the company traded.

What do you people think about this?
Thanks Micron

Answer 1

Whatever you do, don't set up an automatic stop-loss. Know your stop loss price in your mind, and manually sell if the stock falls to your stop.
If you enter in an automatic stop loss, you are showing your hand to everyone. The manipulators love to shake out the stops and steal people's shares for cheap, and then the stock might end up doing very well, after the shake-out.

Answer 2

There was ample opportunity to get out of the way of the last correction before it hit. But if you failed to read those signs, you have to sell on the drop.

When the drop comes, you have no way of knowing how far or how long that drop will last. The fact that this past time was short-lived and the markets rallied back very quickly is merely a random event. Next time, the case may be very different, very costly and potentially fatal. The risk of holding is much too great. On the other hand, if you had sold before the correction, you would have been in a position to reload on the drop as Muncie has suggested.

Your real problem isn't in deciding whether to hold on the drops. At that point, selling is the only intelligent option for the trader who finds himself still holding positions. Your real problem is how to recognize that a top is in the offing.

Answer 3

Stock prices are a random walk. The fact that its down at any particular point of time means nothing for the future value. The price is as likely to go up further as it is to go down. If you are a value investor and believe in the company, you should buy more if it won't throw off your diversification. If you are a growth investor, you should sell because your momentum is gone. If you are either type of investor, you should consider using options for greater capital efficiency.

In general, momentum approaches to investing do not beat the buy-and-hold index because of both adverse stock selection (people pick large growth stocks, in contradiction to the three-factor model) and transaction fees, so the odds are very likely that you would be better off in an index fund. You can still lever your index fund if you want a little more juice for your dollar.

Answer 4

In my mind, the events you describe are opportunities to buy more. Such anomolies are best described as panic selling and the best money is made when there is blood running in the streets. But, one does need to be very cautious. Remember Oct 1929. The blood ran in the streets for years. Actually, the best time to sell is when everything looks rosy and everbody is talking about how much money they are making in the stock market. Sort of reminds me of today as a matter of fact. Maybe one should be selling.

Answer 5

You have to have absolute buy and sell values...otherwise it is just the luck of the draw for you. If you buy say SIRI at $3.75 and say your goal is a gain of 10% with a stop at 5% then you should honor that...global angst or not. See, SIRI falling below your investing parameters means SOMETHING is not according to plan...you should wait in cash until something WITHIN your parameters proves invest-worthy.