Following a successful breakout to new highs, investors should have a strategy for locking in profits to capitalize on gains as much as possible. Setting targets on how to sell stocks is one of the four pillars of the IBD Methodology.
Investor's Business Daily readers know that IBD has long encouraged readers to limit their downside risk in every trade. Cut losses in each trade at 7% or less without hesitation and move on to the next trade. The golden rule of selling is as simple as that.
But on the upside, the decision to take profits can be murky. So here's a specific rule for investing success: Following a breakout, take most of your profits when the stock climbs 20% to 25% from the correct buy point.
Why 20% to 25%? Research shows that most leading growth stocks will start to roll over after they've advanced that much from breakouts. It's why IBD MarketSurge charts highlight those profit targets.
If the market conditions are extremely bullish and you believe you have a big stock market winner on your hands, then go ahead and sell just a part of the position, perhaps a third or one half, to lock in at least some gains. Keep the remainder and watch the stock's behavior to decide when to sell the rest.
The exception to this sell rule? If your stock produces a gain of 20% or more within three weeks of breaking out of a proper base, you may have an exceptional winner on your hands.
IBD research shows that in many cases, stocks that make this quick and powerful move are capable of doubling or tripling in price. Unless your stock shows a clear sell signal, you should try to hold for at least the first eight weeks of such a move.
How to Sell Stocks: MercadoLibre Hits Profit Zone
MercadoLibre has been a solid performer in 2024, with a year-to-date gain of roughly 30%. That tops the gains for the S&P 500 and the Nasdaq.
The stock began forming a 27%-deep cup with handle in February. The pattern continued forming until shares broke out past a 1,792.05 buy point on Aug. 6 (1).
In the third week of September, the stock had climbed 20% from the buy point (2). Investors who took profits would have avoided a sharp pullback to the 10-week moving average (3). Shares are now trying to rebound from that support level.
Investors who purchased MercadoLibre at its Nov. 14, 2023, breakout from a 1,398.59 buy point could have taken a 20% profit in January 2024. During that run, the stock formed a flat base. Investors who bought at that breakout saw all gains erased about a month later.
Follow Scott Lehtonen on X, formerly known as Twitter, at @IBD_SLehtonen for more on growth stocks and how to sell stocks in the stock market.
